2016 Strategica Proceedings - Volum
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Andrei Costanda2016 Strategica Proceedings - Volum
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Andrei CostandaSTRATEGICA
Opportunities and Risks in the
Contemporary Business
Environment
CONFERENCE HONORARY CHAIRS
Remus Pricopie, Rector, National University of Political Studies and Public
Administration (SNSPA), Romania
Alina Bârgăoanu, Vice-Rector, National University of Political Studies and Public
Administration (SNSPA), Romania
CO-CHAIRS
Constantin Brătianu – Professor, Bucharest University of Economic Studies, Romania
Florina Pînzaru – Dean, Faculty of Management, SNSPA, Romania
TRACK CHAIRS
Andreia Gabriela Andrei, "Alexandru Ioan Cuza" University of Iași, Romania
Lucian Anghel, SNSPA, Romania
Ettore Bolisani, University of Padova, Italy
Ovidiu-Niculae Bordean, Universitatea Babeș-Bolyai, Romania
Constantin Brătianu, Bucharest University of Economic Studies, Romania
Johan Cottyn, Vives University, Belgium
Patrizia Gazzola, Insubria University, Italy
Bogdan Glăvan, Romanian-American University, Romania
Alina Daniela Mihalcea, SNSPA, Romania
Andreea Mitan, SNSPA, Romania
Mariana Nicolae, Bucharest University of Economic Studies, Romania
Cristian Păun, Bucharest University of Economic Studies, Romania
Mauro Romanelli, University of Naples Parthenope, Italy
Victoria Seitz, California State University, San Bernardino, US
Sergiu Octavian Stan, SNSPA, Romania
Laurențiu-Mihai Treapăt, SNSPA, Romania
Elena-Mădălina Vătămănescu, SNSPA, Romania
Ralf Wagner, University of Kassel, Germany
Alexandra Zbuchea, SNSPA, Romania
SCIENTIFIC COMMITTEE
Laurențiu Anghel, Bucharest University of Economic Studies, Romania
Nedra Bahri-Ammari, IHEC of Cartage, Tunisia
Dumitru Borţun, SNSPA, Romania
Nicholas Chandler, Budapest Business School, Hungary
Johan Cottyn, VIVES University, Belgium
Camelia Crişan, SNSPA, Romania
Nicolae Dănilă, Bucharest University of Economic Studies, Romania
Daniel Glaser-Segula, Texas A&M University San Antonio, Texas, US
Bogdan Glăvan, Romanian-American University, Romania
Omkumar Krishnan, Chonnam National University, India
Raquel Meneses, University of Porto, Portugal
Mariana Nicolae, Bucharest University of Economic Studies, Romania
Luminița Nicolescu, Bucharest University of Economic Studies, Romania
Dimitrios Nikolaidis, City College International Faculty of Sheffield University, Greece
Marina Ochkovskaya, Lomonosov Moscow State University, Russia
Cristian Păun, Bucharest University of Economic Studies, Romania
Lajos Szabó, Pannonia University, Hungary
Eduardo Tome, Universidade Europeia, Laureatte Group, Portugal
Wioletta Sylwia Wereda, Warsaw Military Academy & Siedlce University of Natural
Sciences and Humanities, Poland
ORGANIZING COMMITTEE
Alexandra Zbuchea, SNSPA, Bucharest, Romania
Lucian Anghel, SNSPA, Bucharest, Romania
Elena-Mădălina Vătămănescu, SNSPA, Bucharest, Romania
Ramona-Diana Leon, SNSPA, Bucharest, Romania
Andreea Mitan, SNSPA, Bucharest, Romania
Lucian Simion, SNSPA, Bucharest, Romania
ADDITIONAL REVIEWERS
Vlad-Andrei Alexandru, SNSPA, Romania
Oana Almășan, Arizona State University, US
Andreia-Gabriela Andrei, "Alexandru Ioan Cuza" University of Iași, Romania
Anca Bibiri, "Alexandru Ioan Cuza" University of Iași, Romania
Gabriela Boldureanu, "Alexandru Ioan Cuza" University of Iași, Romania
Constantin Brătianu, Bucharest University of Economic Studies, Romania
Patrizia Gazzola, Insubria University, Italy
Anda Gheorghiu, SNSPA, Romania
Elena-Alexandra Gorgos, SNSPA, Romania
Ramona-Diana Leon, SNSPA, Romania
Andreea Mitan, SNSPA, Romania
Mihaela Mocanu, "Alexandru Ioan Cuza" University of Iași, Romania
Mariana Nicolae, Bucharest University of Economic Studies, Romania
Laura Pricop, "Alexandru Ioan Cuza" University of Iași, Romania
Mauro Romanelli, University of Naples Parthenope, Italy
Laurențiu-Mihai Treapăt, SNSPA, Romania
Elena-Mădălina Vătămănescu, SNSPA, Romania
Alexandra Zbuchea, SNSPA, Romania
STRATEGICA
International Academic Conference
– Fourth Edition –
Bucharest, Romania, October 20-21, 2016
Opportunities and Risks in the
Contemporary Business
Environment
Edited by
Constantin Brătianu
Alexandra Zbuchea
Florina Pînzaru
Ramona-Diana Leon
Elena–Mădălina Vătămănescu
All the rights of this version belong to Faculty of Management
(SNSPA), 2016.
Wording, contents and translation quality of the paper are entirely in
the charge of authors. Articles or extracts from this book may be
reprinted on condition that the names of the authors and the title of
the book are clearly stated.
SNSPA, Faculty of Management
6 Povernei Street, Sector 1, Bucharest, Romania
www.facultateademanagement.ro
ISBN (E-book): 978-606-749-181-4
Contents
Foreword / 15
Economics
Accounting changes and transfer price tax compliance: a riskier
environment in Portugal? / 17
António Martins
Neo protectionist activities in international trade / 30
Tamta Mikaberidze
ICT sectoral specialization and concentration in V4+ countries on
regional level (NUTS2) / 42
Kamila Turečková
The European neighborhood policy as a key framework for stability
and economic cooperation / 54
Redouane Mouhoub, Abdelmalek Debbihi
The benefits and the drawbacks of the EU – Algeria association
agreement / 65
Abdelmalek Debbihi, Redouane Mouhoub
Analytical consideration of non-tariff barriers related to Georgian export
to the EU market / 74
Marine Tavartkiladze
Statistical indicators which can be relevant for the study of business
fluctuations: a few examples based on the Romanian economy / 84
Alexandru Pătruți, Matei Apăvăloaei
Globalization in the tourism industry and its impact on travel destinations.
Case study of undeveloped beaches on the Romanian Black Sea coast / 96
Silvia Patricia Dodu, Ioana Cristiana Patrichi, Daniela Firoiu
The application of cluster analysis in measurement of human
development / 110
Ingrid Majerova, Jan Nevima
Employment prospects for manufacturing and service enterprises
in the European Union / 122
Inese Mavlutova, Grigory Olevsky, Kristaps Lesinskis
Employment opportunities in the context of the Georgia - EU association
agreement/ DCFTAS. Gender overview / 135
Nugzar Todua, Charita Jashi, Tamar Jangulashvili
Finance and Banking
Managing the market risk in banks / 147
Laurenţiu-Mihai Treapăt, Lucian Claudiu Anghel
Credit risk and rating regulation: A comparative study applied
to the Chinese and European financial markets / 157
Xuheng TONG
Investors’ behavior: the case of mutual funds in Hungary / 174
Florentin Gabriel Tudorache, Luminiţa Nicolescu
Revisiting the influence of reformed pension regimes on domestic
capital markets: 1990-2014 / 192
Maria Nela Seijas Gimenes, Juan Gabriel Brida Ogrizek
Foreign exchange market efficiency in selected Sub-Saharan African
countries: a test for martingale difference hypothesis with structural
breaks / 205
Patrick Olufemi Adeyeye, Olufemi Adewale Aluko
Marketing and Consumer Behavior
Collaborative brands – digital value creation in the collaborative
economy / 219
Minna-Maari Harmaala
Online visibility - opportunity to increase tourism competitiveness.
The case of the hotels on the Romanian seaside versus the Bulgarian
seaside / 234
Mihai Costea, Cristian-Valentin Hapenciuc, Gabriela Arionesei
From data collection to behavior prediction: what is after big data and small
data? Predictive marketing and the path to successful business / 248
Steliana Moraru, Paolo Vincenti
ECOC 2021 cultural strategies: an analysis of the shortlisted Romanian
European capital of culture candidate cities / 260
Alexandra Nicu, Ruxandra Dumitru
Analysis of promotional strategies in primary schools / 272
Eva Tóblová
The acceptance of mobile payments in the German retail market / 283
Oliver Schuster, Christine Falkenreck, Ralf Wagner
The effect of microfinance on Jordanian women’s socioeconomic
empowerment and marketing practices / 296
Motteh S. Al-Shibly, Reem M. Alrefai’
Elements of an effective sale process: the successful salesman
between myth and reality / 308
Costin Dămășaru, Mihai Mihalache, Andra Crăciun
Chasing experience. How augmented reality reshaped the
consumer behavior and brand interaction / 317
Rareș Mocanu
Global value chains from a multidimensional perspective.
A preliminary insight / 324
Vlad-Andrei Alexandru
Modelling and Prediction in Marketing and Management
Exploring academics’ intentions for doing research and publishing / 333
Ioana Alexandra Horodnic, Adriana Zaiț, Andreea Apetrei, Patricia Bertea
Why extending examination with non-parametric approaches?
Insights from a study on advertisement's effectiveness / 347
Andreia Gabriela Andrei, Adriana Zaiț, Elena-Mădălina Vătămănescu
Forecasting consumers’ standpoints on the European e-commerce / 359
Elena-Alexandra Gorgos, Elena-Mădălina Vătămănescu
Tourism behavior of young people. A comparative perspective using different
factor analyses methods / 370
Oana Țugulea, Claudia Bobâlcă, Liviu-George Maha
Linking entrepreneurial orientation to firm performance in a post-socialist
market context: the case of Hungary / 383
David Kovacs, Taylan Ürkmez, Dominik Brockhaus, Ralf Wagner, Katrin Zulauf
Technology entrepreneurship in Romania - a great opportunity for the future
years / 395
Anda Gheorghiu
Management and Leadership
Ensuring the viability of Romania’s institutions of higher education:
the need for strategic planning / 407
Victoria A. Seitz, Olesia Mihai
Interdisciplinary field of strategic and change management in the
growing Hungarian SME’s sector / 417
Attila Kurucz
Website model used for employee recruitment / 429
Mirela-Catrinel Voicu
Challenging the resource based view. An analysis of the relation
between the board of directors and performance / 438
Ovidiu-Niculae Bordean, Anca Borza
Communication climate, work locus of control and organizational
commitment – results from an exploratory study / 449
Virgil Gheorghe
An exploratory study regarding the moderating role of incivility between
occupational stress and counterproductive work behavior / 460
Iulian Ojog, Dan Florin Stănescu
A workday – from an energetic point of view / 471
Andronicus Michael Torp, Corina Cipu, Anca Alexandra Purcarea
Responding to discontinuities – alternating action patterns of value
appropriation / 483
Marta Najda-Janoszka
The creation of a school leadership teamwork by person-centred
approach (PCS) / 495
Mária Pisoňová
The role of classroom management in conditions of lower secondary
level of education in primary schools in the Slovak Republic / 509
Adriana Nagyová
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff
Integrating institutional theory with market orientation to study SMEs
in transition economies: a conceptual model / 521
Kathleen Welsh Voges, Daniel Glaser-Segura
Ensuring the competitiveness of high-tech industrial enterprises and
their role in the innovation economy / 533
Natalia Polzunova, Tatiana Starikova
Identification of perspective research areas in the field of regional
economy: Russian and foreign experience / 548
Natalia Filimonova, Raisa Fedosova, Boris Kheifits
Comparative statistical analysis of existing differences in the regional
development of Romania regarding the main socio-economic indicators / 560
Cristian-Valentin Hapenciuc, Daniela-Mihaela Neamțu, Ruxandra Bejinaru
The characteristics of innovation and the technological diffusion / 575
Raul Florentin Drența, Gabriela Lobonțiu
City branding as marketing innovation in local administration / 586
Gabriela – Virginia Popescu, Cristina Leovaridis
Valorization of the learning organization’s principles in the business
higher educational system (HES) / 600
Ruxandra Bejinaru, Cristian-Valentin Hapenciuc
The interest in entrepreneurship among Romanian students / 612
Valeriu Frunzaru, Cristina Leovaridis
Fostering students' interest for experiential learning - the case of
Grenoble digital marketing bootcamp / 621
Alexandru Căpăţînă, Gianiţa Bleoju, Emilie Hoareau
Uses and gratifications of Facebook among Romanian graduate students / 630
Oana Ştefăniţă, Georgiana Udrea, Raluca Buturoiu, Nicoleta Corbu
Emerging economy consumer perception: a social capital explanation / 641
Daniel Glaser-Segura, Kathleen Welsh Voges, Pablo J. Calafiore, Omkumar
Krishnan, Irina-Iulia Salanță, Laurențiu Dan Anghel
Performance measurement and intellectual capital: main frameworks and
research agenda / 653
Raúl Rodríguez-Rodríguez, Juan-José Alfaro-Saiz, María-José Verdecho, Ramona-
Diana Leon
The nexus between knowledge management and innovation. A literature
review / 662
Ramona-Diana Leon, Ettore Bolisani
International and Intercultural Management Challenges
The role of internationalization in the firm’s life cycle: a decisional model for
establishing the most suitable strategic partnership / 679
Ana-Maria Giurea
Cultural intelligence implications for management and leadership: applying the
cultural intelligence scale in Eastern Europe / 691
Richard Boyd Johnson, Diana Mirza-Grisco, Svitlana Buko
The role of an enterprise culture for risk management / 703
Elvira Kuhn
The perception of young Romanian citizens about multicultural risk and social
cohesion challenges, in economic activities and projects / 715
Sergiu Octavian Stan, Alexandru Radu Duicu
Associated risks to decision management in Romanian IT industry, in the
context of social and political integration opportunities for development / 727
Alexandru Radu Duicu, Sergiu Octavian Stan
Successful Management in Service Economy
Financial institutions and their impact on the development
of contemporary companies in Ecuador / 739
Martha Paola Alvarado Vera, Ruben Bernardo Manrique Pincay
State of play of banking industry in Indonesia. An application
of space analysis / 756
Nuri Wulandari, Riani Issegana
Horizontal hotels and similar accommodation – classification
and franchising as an option for their international visibility / 766
Iva Slivar, Sanja Dolenec, Roberta Kontošić
Exclusive vs. non-exclusive distributors. A case study of elevator
installation & service industry in Albania / 778
Mimoza Manxhari, Rezarta Hasanaj
Measures to support the small business act initiative in Slovakia in the field
of innovation / 788
Ľubica Lesáková, Peter Laco
Business Ethics and CSR
Boosting sustainability from beyond: micro-politics and the role
of regional headquarters / 801
Andreas G.M. Nachbagauer
Ethical dimension of CSR in the Romanian banking sector / 815
Georgiana-Loredana Frecea
The digital NGO: some ethical insights / 826
Alexandra Zbuchea, Florina Pînzaru, Cristian Vidu
A citizen-driven alternative to corporate social responsibility / 834
Brîndușa Palade
Diversity management: adding value in family business? / 844
Lilian Snellman
“Is there a place for me?” Employment of people with disabilities
as part of CSR strategy / 860
Sara Csillag, Zsuzsanna Győri
CSR in e-recruitment and its use by large Polish organizations / 873
Jacek Woźniak, Kinga Wołodźko
Fostering Entrepreneurship through CSR
Social entrepreneurship and disclosure of non-financial
information. Evidence from the European Union / 885
Stefano Amelio
Public service entrepreneurship: the perspective of the entrepreneurial
opportunities concept / 898
Iuliia Iliashenko
Building sustainable healthcare organizations / 909
Mauro Romanelli
The dynamic capabilities in low-cost high-value companies:
the Italian health care / 918
Elena Querci, Patrizia Gazzola
From shareholders-value creation to corporate social entrepreneurship / 928
Patrizia Gazzola, Piero Mella
Rethinking entrepreneurial culture towards CSR / 939
Patrizia Gazzola, Gianluca Colombo
Fostering sustainable development, entrepreneurship, and social
innovation through CSR: the new role of university / 951
Cristina Mititelu, Gloria Fiorani, Irene Litardi
SMEs and social responsibility: does firm age matter? / 963
Alina Badulescu, Daniel Badulescu, Tomina Saveanu, Roxana Hatos
What kind of visibility affects a firm’s sustainability disclosure? / 976
Giovanna Gavana, Pietro Gottardo, Anna Maria Moisello
Evolution of tourism demand and development of sustainable
tourism: what impact on tourist destinations? / 986
Enrica Pavione, Roberta Pezzetti
Cycle tourism as a form of sustainable tourism: the importance
of a policy for its enhancement / 997
Enrica Pavione, Roberta Pezzetti
The valorisation of “slow territories” through the development of
sustainable and experiential tourism / 1007
Enrica Pavione, Roberta Pezzetti
Towards Sustainable Public Organizations
Towards sustainable tourism development / 1017
Mirela Mazilu, Daniela Dumitrescu, Amalia Bădiță
Development of Romanian cities based on a European
smart city concept / 1029
Florin Nemțanu, Marius Minea, Dorin Buretea, Ilona Costea
Towards sustainable public organizations: measures for
improvement / 1040
Victor Nwaoba Itumo
The role of green public procurement at the UE level in sustainable public
administration through CSR /1050
Irene Litardi, Gloria Fiorani
Public administration, change and modernization / 1063
Dakhane Noureddine, Zerrouga Ismail
New technologies for sustaining democracy and participation / 1070
Mauro Romanelli
Rediscovering public service motivation within public organizations / 1079
Mauro Romanelli
New technologies for restoring trust in public organizations / 1088
Mauro Romanelli
Understanding governance of parliamentary administrations / 1098
Mauro Romanelli
Public procurement system performance indicators. Case study
of Romania / 1107
Mirela Violeta Pătraș
Foreword
The fourth edition of the Strategica International Conference (October 20-21, 2016)
focuses on the opportunities and risks in the contemporary business environment.
Bringing together around 150 participants from 25 countries, the event has been
conceived as a great opportunity for interdisciplinary discussions and debates on the
varied suitable ways for businesses, financial and public institutions, governments and
nonprofit organizations to approach the new environmental conditions.
The imperative that organizations should keep pace with the business dynamics
nowadays is no longer seen as a development opportunity, but as a survival mission. The
worldwide tendencies and innovations in specialized fields, the global market trends
brought about by global competitors have dramatically changed the pulse of the
business environment. A new paradigm has currently emerged, respectively, what was
once meant to be a major business opportunity, it has progressively turned into a risk
mitigation endeavor.
Along with the evolution of the business environment, the adjustment of the business
model approach has become mandatory. The ability and art of managing and adapting
to organizational changes are no longer a future challenge, but a topical problem to be
assumed and efficiently capitalized. Organizations are at the crossroad of external forces
and of internal shifts and this is why proactive attitudes and synchronized rhythms are
decisive for the generation of sustainable competitive advantage.
The organizational approach towards opportunities and risks often sets itself up as a
milestone for business growth and performance. In this respect, the global economy has
consistently encouraged sustainable business relations within a highly interconnected
environment where professional and industrial networks become opportunity catalysts
and risk limitations. In order to be more competitive, to adapt wisely to the conditions
of the new markets, to be proactive and dynamic in a fast-changing organizational
environment, there is a clear pressure towards the integration into a broader interlinked
system, that is, cohesive business networks, where loyalty, commitment, engagement
and long-term and reciprocal benefits are of the essence.
In other words, the new paradigm on global businesses is open to the process of
organizational change which ensures that managers and entrepreneurs become aware
of the environment dynamics and act accordingly. The focus should be on a
multidimensional framework which starts from a macro perspective - Economics,
Finance, and Banking -, continues with a micro insight - Marketing and Consumer
Behavior (predicting and developing models), Management and Leadership challenges
(stressing on the issue of internationalization and intercultural collaboration), and ends
with a more optimistic vision referring to Business Ethics and CSR and the Sustainability
desideratum. All the mentioned themes are credited with a high level of relevance and
applicability in today’s business environment, a fact which welcomes a thorough
discussion in this respect within the boundaries of the current volume.
The Editors
ECONOMICS
Economics 17
ACCOUNTING CHANGES AND TRANSFER PRICE TAX COMPLIANCE: A RISKIER
ENVIRONMENT IN PORTUGAL?
António MARTINS
University of Coimbra
165 Dias da Silva Av., Coimbra, Portugal
amartins@fe.uc.pt
Abstract. In 2010 Portugal adopted an IAS-based system of financial accounting.
Detailed rules on transfer pricing do exist in Portugal since 2001. In transfer pricing
methods, especially when based on margins, accounting indicators are of paramount
relevance to assessing the profitability of firms, and to compare such indicators to
samples of similar companies. The purpose of this paper, drawing on the legal research
method, is to discuss the following question: when using the transactional net margin,
quite common in transfer pricing tax reporting, does the new Portuguese financial
accounting system produce profit level indicators that are closer to the underlying reality
that transfer pricing aims to capture, or are these profit level indicators of a lower
quality than before? Our main conclusion is that the new accounting regime has a
significant potential for increasing uncertainty and compliance costs in the area of
transfer pricing, given the nature of operating income adopted in the new IAS based
system.
Keywords: tax environment; tax compliance risks; financial accounting; transfer pricing;
Portugal.
Introduction
In 2010, Portugal adopted an International Accounting Standards (IAS) based system
of financial accounting. Issues like fair value, impairment charges, provisions or
financial instruments´ valuation deeply affected the nature and values of recorded
assets, liabilities, revenues, and costs. The discussion if management decision making
is now anchored in better accounting data is a highly charged one, given recent
developments in the wake of the financial crisis (Autrey, 2012; Martins, 2012).
Detailed rules on transfer pricing do exist in Portugal since 2001. Curtailing the
possibility of using intragroup transactions to manipulate the tax base was a major
policy goal, and the tax law followed international best practices in laying out specific
transfer price rules. OECD´s Guidelines were the building block of transfer price laws
and regulations (OECD, 2010; Pereira, 2014). Dealing with transfer pricing has a
significant degree of subjectivism, centered on the concept of comparability of
transactions. As such, it is prone to risks in tax compliance and is a potential source of
litigation (Autrey, 2012). In transfer pricing methods, particularly the ones based on
margins, accounting indicators are of paramount relevance to assessing the
profitability of firms and refer such indicators to samples of comparable companies
(Hyde & Choe, 2005; Miller & Lynne, 2014).
18 Strategica 2016
Variables like return on assets, return on sales, gross margins and operating income,
constitute relevant accounting indicators that are essential to evaluate if transactions
between related parties are conducted by respecting arm´s length conditions (Cools,
Emmanuel & Jorissen, 2008).
The purpose of this paper, drawing on the legal research method, is to discuss the
following questions: when using the transactional net margin, quite common in
transfer pricing tax reporting, does the new Portuguese financial accounting system
produce profit level indicators that are closer to the underlying reality that transfer
pricing aims to capture, or are these profit level indicators of a lower quality than
before? Risks in tax compliance, in the area of transfer pricing, were reduced or
increased by the new accounting paradigm?
Our analysis is centered on the discussion of the accounting recognition of revenues
and expenses, and how operating income is computed in the new system. In our
perspective, the necessary adjustments to arrive at consistent profit level indicators
increased, given the underlying options of the new accounting system. In particular,
the concept of operating income is affected by the adoption of a much-extended
definition of operational revenues and costs, masking, in our view, the nature of what
should be presented as the regular, or recurrent, performance of firms.
The paper will, firstly, present a brief review of the relevant international literature on
financial accounting developments and the transfer pricing core issues, with particular
emphasis on OECD Guidelines; then will present the Portuguese tax and accounting
scene; and finally, focus on the analysis and discussion of the aforementioned research
question. We believe it is a relevant contribution to tax policymakers, accounting
standards setters and tax authorities, given the practical complexity of transfer pricing
and its links to accounting information.
Analysis
The methodology used in the paper draws on legal research. Here, the so-called
evaluative approach is the chosen perspective. As van Hoecke (2011) states, the legal
research method is often criticized by not making the empirical sciences´ type of
generalizations. There are no general valid principles derived from legal research,
since many problems are, by nature, related to national legal systems and, therefore,
proposed solutions are not valid outside a specific territory. However, we believe that
the nature of the accounting and tax issues identified and discussed in the paper is
relevant outside Portugal, given the widespread adoption of IAS based accounting
systems and the multinational impact of transfer pricing principles´ and legislation.
Our purpose is to discuss the research question identified at the beginning the paper.
Thus, the interpretation of legal texts (accounting standards and transfer pricing
legislation) and the ratio legal discussion, the evaluation of advantages and
disadvantages of the new version of operating income and the use of hypothetical
situations where the quality of information impacts transfer pricing tax compliance be
used to analyze the topic.
Economics 19
Taking into account the aim of this study, the discussion of a Portuguese particular
feature of corporate financial information and tax system can highlight useful policy
points to a broader audience (Hutchinson & Nigel, 2012). Many OECD countries face a
dire situation in budgetary terms. Therefore, given the pressure to increase tax
receipts, transfer pricing issues can shed some light on solutions being applied in other
countries, and enhance awareness of corporate tax policy points.
Transfer pricing (TP) deals with prices used between associated firms for the transfer
of goods, services and intangibles. As these prices can be used for the manipulation of
taxable income, the arm´s length principle is the basis of TP control by tax authorities
(OECD, 2010; Smith, 2002). The arm’s length principle demands the use of transactions
of independent companies as a benchmark to determine how profits should be
allocated in the context of transactions between related parties. It compares the prices
a company has contracted with its associated enterprises with what a truly
independent enterprise would have done in similar circumstances.
Moreover, countries have a right to protect their fiscal base form tax avoidance
strategies, based on transfer pricing, used by corporations. The location of profits in
low-tax jurisdictions is a well-known tax-minimizing strategy. It is not surprising that,
in recent decades, an increasing number of legislative tools have been adopted to
counter such practices. Additionally, transfer pricing legislation demands that
companies report increasing data (e.g., sales, assets, profits, employees, royalties,
financial transfers) that are related to different jurisdictions. Also, the level of
cooperation between tax authorities of different countries can act as a counterbalance
to the manipulation of the tax base. By cross-checking international transactions,
countries are able to capture and fight some of the most common strategies to locate
profits in favorable tax jurisdictions.
In political terms, this reaction of policy makers and tax authorities increase fairness,
by trying to tax mobile income flows. Even if partially successful, it is a positive factor
in the public perception of fighting evasion and may increase revenues in times of
stringent budgetary policies. The OECD (2013) Base Erosion and Profit Shifting project
and the measures put forward to tackle tax avoidance by multinationals, is a sign of
increasing awareness of policymakers. In this Action Plan, transfer pricing issues are at
the center of actions 8, 9, 10 and 13. These actions relate to a better alignment between
prices and intangibles´ location, functions, and risks of each party contributing to an
economic transaction. Also, there is a call for an increase in information disclosure for
big international groups. If this ambitious plan becomes effective, additional steps will
be implemented to strengthen the right of sovereign states to fight tax avoidance in a
more coordinated way.
As said, the arm´s length prince is the cornerstone of fighting transfer pricing potential
evasive practices. The principle requires related enterprises to charge the same price,
in the context of a controlled transaction that would be charged by independent firms,
in an uncontrolled transaction in comparable circumstances. It represents the closest
approximation to an open market scenario and would produce a reasonable allocation
of income within a multinational group (Cools et al., 2008; OECD, 2010; Pereira, 2014).
The arm’s length principle can be implemented by the following steps:
- characterize transactions between associated enterprises and document them;
20 Strategica 2016
- select the most appropriate transfer pricing methodology and document the choice;
- apply the most appropriate transfer pricing methodology, determine the arm’s length
outcome and document the process;
- implement support processes, including review steps, to ensure adjustment for
material changes.
If a transaction’s price, charged between non-related parties is, in all material respects,
comparable to the transfer price between related enterprises, it becomes a comparable
uncontrolled price. While all comparability factors should be considered, the most
important ones are the similarity of products, contract terms, and economic/ market
conditions. However, in many real-life situations, the uncontrolled market price is not
observable. Consequently, the comparison is not based on these prices, but by using
margins, taken from samples of comparable firms, and then pairing median or quartile
values with margins computed for the tested party. Thus, as margins are derived from
accounting numbers, with a special emphasis in operating expenses and revenues,
accounting data are crucial in many TP cases. A digression on this issue is clearly
important.
Before 2010 Portugal had a financial accounting system based on the "Plano Oficial de
Contabilidade" (POC). Although it incorporated many developments observed in EU
after POC´s setting up, in 1977, it was not an IAS-based system. In particular, the
computation of firms´ net income was divided, purposively, into operating, financial
and extraordinary items, which helped users of financial information to have a detailed
grasp on how income was originated. Table 1 shows, for a hypothetical entity, the
income statement that, in the context of POC, it would exhibit.
Table 1. Income statement (POC) - in euro
Type Indicators Value
Costs Cost of merchandises 148.698,30
Cost of raw materials 7.995.624,28
Services from third parties 4.916.072,52
Salaries and wages 1.355.835,92
Social security contributions 537,52
Other salary related charges 430.819,86
Depreciation 392.247,16
Adjustments on asset values, other than depreciation 280.204,71
Taxes 59.684,99
Other operating costs 7.500,00
Interest paid 601.757,19
Extraordinary losses 63.172,00
Income tax 0,00
Net income 160.765,32
Total 16.412.919,77
Revenues Sales of merchandise 969.200,98
Sales of products 12.956.759,99
Services rendered 1.355.819,51
Works for the entity 36.058,90
Supplementary revenues 84.212,28
Economics 21
Other operating revenues 93.857,14
Financial income from equity holdings 121.825,51
Interest received 33.157,83
Extraordinary gains 762.027,63
Total 16.412.919,77
Income Operating income -91.316,46
Financial income -446.773,85
Extraordinary income 698.855,63
Income before tax 160.765,32
Net income 160.765,32
As Table 1 shows, the operating income is negative (€ -91,316,46), as well as the
financial income (€ -446.773,85). Net income (€+160.765,32) is thus obtained by an
important (positive) contribution of extraordinary or non-recurrent items
(+698.855,63) that compensates for the negative operating and financial income. From
this simple example, two conclusions can be drawn.
The first one, on the company's operating performance, which reported a loss. This is
not, in general, a positive feature and usually requires better management of operating
revenues and costs. Second, the composition and breakdown of accounts
"Extraordinary losses" and "Extraordinary gains" is necessary to enable users of
financial statements forming a detailed view of what is included in extraordinary
income. In this particular case, extraordinary items are very relevant (even decisive) to
a positive net income. Thus, a critical analysis of extraordinary gains and losses is a
crucial step for a financial analyst. Breaking down, for example, the economic facts
recorded in Account 69 - "Extraordinary costs and losses" of POC is a helpful exercise.
It included the following subaccounts:
69- Extraordinary costs and losses
691 Donations
692 Uncollectible debts
693 Loss on inventory (theft, mishandling)
694 Capital losses on fixed assets
695 Fines and penalties
696 Extraordinary amortizations of assets
697 Losses from previous years
698 Other extraordinary losses
As shown in POC´s account 69, it includes the registration of facts concerning events
typically unusual or non-recurring in the regular economic life of companies. In fact,
phenomena such as uncollectible debts, inventory theft, losses on investments
(financial, tangible and intangible), fines, and other of similar nature do not affect the
operating income. If extraordinary income is seen as derived from operations outside
the ordinary or regular course of business activity, then this option inserted in POC
was, in our view, perfectly adequate. Why did the new regime (Sistema de
Normalização Contabilística - SNC) change it?
For a first glimpse of the issue, let us see Table 2, which presents the income statement
prepared by an entity subjected to this new regime (SNC).
22 Strategica 2016
Table 2. Income statement by nature (SNC) - in euro
Indicators Value
Sales and services rendered 13.960.172,10
Subsidies 0,00
Gains/losses on financial investments -1.290.386,11
Works for the entity 2.512,95
Cost of raw materials 7.549.973,63
Services provided by third parties 4.733.702,19
Personal costs 1.947.779,24
Impairment losses on trade debts 1.822.413,80
Provisions 644.470,71
Fair value adjustments 0,00
Other revenues and gains 3.814.443,12
Other expense and losses 1.436.666,81
EBITDA -1.648.264,32
Depreciation 428.148,05
EBIT (Operating profit) -2.076.412,37
Interest received 0,00
Interest paid 401.979,14
EBT -2.478.391,51
Corporate income tax 16.665,04
Net profit -2.495.056,55
Quite important differences emerge from Table 2 between this new type of income
statement and the one adopted by POC. One of the most critical is how net income is
originated. Indeed, EBITDA (Earnings before depreciation, taxes and financing costs) is
the first of several types of profits to emerge (-1,648,264.32). Then, depreciation,
amortization, and some impairment are subtracted to determine EBIT or operating
income (-2,076,412.37). Thus, from the outset, if we look into accounts "Other
revenues and gains" (3,814,443.12) and "Other expenses and losses" (1,436,666.81) it
easily follows they significantly impact EBIT. That is, residual items of revenue and
costs have a highly material impact on operating income. However, given their
designation, it is worthwhile to dissect the true nature of these, supposedly, residual
revenues and expenses.
Taking a closer look into account 68- “Other expenses and losses”, shown in the SNC
plan of accounts, the following subaccounts are found:
68 - Other expenses and losses
681 Taxes
682 Financial discounts
683 Uncollectible debts
684 Loss on inventory (theft, mishandling)
685 Expenses and losses on subsidiaries (e.g.; capital losses)
686 Expenses and losses in other financial investments (e.g.; capital losses)
687 Expenses and losses in fixed assets (e.g.; capital losses)
688 Other
6881 Losses from previous years
6882 Donations
Economics 23
It is, in our view, quite reasonable to argue that items such as capital losses,
uncollectible debts or inventory theft will be events of a usually nonrecurring nature,
or outside the core activities of a company (Martins, 2012; Mulford & Comiskey, 2002).
The scope of accounts 68 (and 78, which is the reverse, for the revenue side) of the
SNC came, in our view, to include phenomena that, given the informational needs of
users, would be better disclosed separately and not amalgamated on EBIT. The nature
of operating incomes is now more uncertain, fuzzy and exhibits a lower quality than
the notion adopted by POC. How did the new Portuguese accounting system opted for
a concept of operating income that includes items that are clearly extraordinary, or
non-recurrent, in nature?
The reason most commonly given for the new concept of operating income in the SNC
is that international accounting standards do not include an explicit definition of
operating income (IAASA, 2013). In addition, it is ventured that events such as sales of
assets, uncollectible debts, donations, impairments, to mention just a few, are also part
of the economic life of the organizations, and thus not extraordinary or accidental.
Some of them (e.g. divestitures) stem from the very will of managers and, therefore,
have no extraordinary nature, in the sense, they happen outside the regular flow of a
company´s controlled events. Following this perspective, the concept of operating
income should not leave out events that, albeit not recurring or regular, fall within the
scope of management decision making.
We are faced with two perspectives: one (POC) which placed great emphasis on the
separation between operational, financial and extraordinary phenomena. Other (SNC)
that abandoned the concept of extraordinary results, and seems to adopt the view that
business entities will have no such thing as “extraordinary” items. That means all
phenomena or facts that deserve accounting recognition would follow from the
deliberate purpose of management, or to imponderables that a company is normally
subjected, for simply developing its activity in the continuous flow of economic
environment.
For example a cost related to a bad trade debt would not be extraordinary because
exposure to clients who do not meet their debts is a situation, perhaps occasional but
potentially inevitable, that affects a large majority of companies selling goods or
services. An impairment loss in a tangible asset is non-recurring in nature but comes
from economic phenomena to which a company is exposed, like sudden technological
changes, which are not totally strange or absolutely separate from the normal
operations. Given these conflicting views about the nature of operating income, let us
now digress on the literature related to this topic.
Discussion and implications
The accounting and corporate finance literature has dealt thoroughly the issue of
quality and relevance of financial information disclosed by companies and how the
accounting standards to influence (Libby, Libby & Short, 2009; Ross, Westerfield, Jaffe
& Jordan, 2010). The analysis and the centrality of "operating income" have been
suggested by several authors (Libby et al., 2009; Mulford & Comiskey, 2002; Neves,
2012). In this context, Baker, Lembke and King (1993) argue that operating revenues
and expenses arise from on-going major central operations. Gains and losses that are
24 Strategica 2016
"peripheral" or "incidental" should be classified as non-operating. In the context of a
company providing health services, Baker et al. stress that the non-operating gains
result from sources other than the provision of services to patients and related
activities. Non-operating gains should include, among others, investment income, and
gains in real estate transactions. The authors argue that because operating income
does not include the effects of remote or peripheral operations of companies then if
they occur, their effects should be disclosed in non-operating items.
Libby et al. (2009) sustain that "operating activities are the central focus of the
business". Again, operating activities are defined as the normal, regular or primary
focus of a company. The impact of other activities or transactions should not integrate
the operating income. In a financial analysis perspective, Neves (2012) and Ross et al.
(2010) argue that, in the income statement, operating elements should relate to
normal or recurrent operations. On the other hand, according to Neves, the definition
of extraordinary elements would include non-standard transactions or facts, outside
the ordinary scope of the business. The same author underlines that the income
statement should be developed in order to determine the operating income, isolating
the accidental and unusual components of profits. Thus, special or unusual items,
discontinued operations, and extraordinary items should be separately identified and
left out of operating income.
For a financial analyst, it is important to grasp operating income and items that are
recurrent in nature. Thus, any event having a nonrecurring nature should be
reclassified in extraordinary income. The detailed identification of these situations -
whether impairment charges, extraordinary provisions, gains and losses resulting
from non-recurring transactions, including the purchase and sale of fixed assets,
discontinuity of business segments, forgiveness of debts - should be disclosed as not
affecting in operating income.
The author notes that in the Portuguese SNC, the account “68 Other expenses and
losses” includes, as a miscellaneous set:
- Sub-accounts related to operating activities (e.g., taxes, inventory gifts to clients)
- Sub-accounts related extraordinary or non-recurrent items (e.g., capital losses, write-
offs)
- Sub-accounts related to financial events (e.g., financial discounts)
A financial analyst should develop a previous reclassification and segregation of these
components, before assessing the true or effective operational performance of an
entity. If, in the finance literature, a strong line argues for segregating several
components that converge in the net income, why did the SNC pursued a path that
departed from this analytical trend? In other words, why amalgamating in operating
income a wide range of phenomena while introducing an IAS-based accounting system,
in Portugal? A first reason stems from the fact that international accounting standards
do not expressly provide a clear dividing line between operating and extraordinary
items. That is, professionals who prepare financial statements have some leeway with
regard to value judgments on how to break down revenues and expenses. Nonetheless,
in our view, this is not a definitive argument. For example, In Ireland, IAASA (2013,
p.7) mentions that International Accounting Standard (IAS) 7 - "Statement of cash
flows" establishes that "operating activities are the main revenue-producing activities
of the entity and other activities which are not investing or financing activities" . The
Economics 25
statement of cash flows is quite clear in separating between operational activities and
non-operating events. IAASA (2013, p.10) also states that when financial statements
issuers present items outside of the area of operating activities, the expectation is that
they will provide detailed explanations.
Their analysis of what constitutes ‘operating activity’ and the basis upon which
amounts affected operating income is highly relevant. Given the importance placed on
“operating profit” in financial reports, and the degree of judgment required in the
classification of items, issuers should consider whether it is necessary to include a
disclosure explaining value judgments. International standards and accounting
literature are open to a non-rigid approach, allowing for the separation of non-
recurring or unusual items. The Portuguese option cannot be seen as flowing from a
mandatory IAS line of amalgamating ordinary and extraordinary items in the EBIT
computation.
Some entities, in search of a certain uniformity of criteria, sought to define rules for the
selection and presentation of designated "exceptional items". The following excerpts
(IAASA, 2013, p.8) are also illustrative examples:
“In presenting the Income Statement, entities:
-are not prevented from including “exceptional” items in the Income Statement
-should select a form of presentation for “exceptional items” (e.g. disclosure in the
accompanying explanatory notes, disclosure as a separate line item on the face of the
Income Statement or presentation as a separate column on the face of the Income
Statement)”.
The SNC could have adopted a more nuanced view, instead of eliminating
extraordinary or non-recurrent items and include them in operating profit. Personally,
we are not convinced of the advantage of this new option, in comparison with what
was established in POC. And, to discuss the potential negative consequences of what
we see as lower quality of financial information, let us turn to the next topic, where
some important issues are analyzed.
Article 63 of the Corporate Income Tax (CIT), on transfer pricing, establishes that:
"1 - In commercial operations, including transactions of goods or services, as well as
financial transactions carried out by a firm and any other entity, which is in a situation
of a special relationship with the former, terms and conditions substantially identical
to those contracted between independent entities, in similar transactions, should be
practiced.
2 - The taxpayer must adopt, for the determination of terms and conditions that would
normally be agreed between independent entities, the method ensuring the highest
degree of comparability between performed operations and substantially identical
transactions under normal market conditions."
Additionally, Regulation C-1446/2001, closely following OECD Guidelines, details
methods that must be used in TP. Its article 10 reads as follows:
"The Net margin method
1 - The net margin method is based on the calculation of the net margin obtained by a
taxpayer in related party transactions, with reference to the net margin obtained in
similar independent operations performed by independent entities.
26 Strategica 2016
2 - The net margin is computed by reference to an appropriate indicator in accordance
with the circumstances, characteristics and the nature of the activity, which may be
represented by sales, costs, assets, or another relevant variable."
The OECD Guidelines (OECD, 2010, p.83), when discussing the transactional net
margin method, underline that, as a matter of principle, “only those items that (a)
directly or indirectly report to the controlled transaction under analysis and (b) are of
an operating nature, should be taken into account in the determination of the net profit
indicator for the application of the transactional net margin method”. This brief legal
overview regarding TP in Portugal is enough to highlight the importance of an
adequate and economically sustained notion of operating income. When margin
methods are used this is a crucial issue for firms and tax authorities.
Tax auditing is often preceded by an in-house analysis, performed by the tax
authorities (TA) services, using companies´ tax returns. When dealing with TP issues,
and the net margin method is adopted by companies to prove they are respecting the
arm’s length principle, certain indicators such as: operating income /assets, operating
income /sales, operating income / expenses are used as financial ratios considered
being proxies to effective margins generated by the core business activity. At a
conceptual level, two companies can have different operating performances and,
nonetheless, their reported operating income being similar if computed on the basis of
SNC rules.
Company A, for example, the independent party, shows an EBIT of 10 million and a net
margin of 10%. Company B, the tested party for TP purposes, has a recurrent EBIT of 3
million, and its net margin could be significantly below the interquartile range used in
TP tax analysis. Then, if company B amalgamates in account 78- “Other operating
revenues” the impact of financial discounts, capital gains, etc., accounting EBIT can
reach 10 million and be inside the acceptable margin range. A superficial comparison
of accounting numbers is, in our view, misleading, because operating margins are not
comparable without adjustments.
On a more concrete and usual situation, suppose a firm ALFA has a related party
(BETA) that is a contract manufacturer. BETA has submitted, in year t, to the
Portuguese tax authorities a TP file, where the net margin method is adopted. The
profit level indicator is net cost plus margin (NCPM) = operating income / expenses
Taking into account that: (i) functional analysis of BETA has shown that the company is
characterized by being a contract manufacturer, whose purpose lies mainly in
efficiently fulfilling production schedules placed by ALFA (the parent); and (ii) BETA
does not perform functions closely related to the marketing and distribution of
manufactured products, it was understood that the use of NCPM is appropriate to the
case. Considering that, taken from a sample of comparable companies, NCPM presents
the following values, for year t:
Table 3. Interquartile range in TP sample
Minimum 1st quartile median 3rd quartile maximum
-1% 2,2% 4% 5,5% 9%
NCPM for BETA, in year t, is 2,5%. However, suppose that in the same year, BETA
booked a reversion for a previously recorded provision. Without that specific
Economics 27
reversion (revenue) NCPM would be -3%. If BETA considered, as it formally could
within SNC´s rules, that the reversion is included in operating income, and the tax
auditor makes an adjustment, arguing that a reversion of a provision is not recurrent
or normal in the ordinary course of business, then only tax courts can decide on the
right course of action.
Recalling what we mentioned in section 4 of this paper about the change of paradigm
between POC and SNC, about the elimination (by SNC) of extraordinary items, and the
content of accounts 68 and 78 of SNC, it is easily anticipated that a detailed tax audit
could challenge the “true” amount of EBIT, given the emphasis on operating items
made by OECD´s Guidelines.
If one looks into issues like capital gains/losses, financial discounts, inventory theft,
fixed assets impairment charges, that in SNC´s accounting system impact operating
revenue, and thus TP operating margin level indicators, it is easy to see that between
managers, auditors and tax authorities, a significant amount of tension can develop in
figuring out what adjustments should be made to reveal the appropriate level of
operating margins.
For tax managers, tax consultants and tax auditors, the new accounting environment
(SNC) is thus more uncertain, in the sense that TP compliance can be riskier. If one
adds that tax courts are, in many cases, not very prone to enter the intricacies of
accounting definitions, a riskier environment can be probably detected in Portugal.
These risks can be mitigated by an enlightened intervention of internal and external
auditors, alerting management to sensible accounting choices and disclosures, mainly
by adopting a proper definition of operating items for TP purposes. In this sense, the
POC based accounting system, by separating extraordinary items, produced an
accounting approximation more attuned to TP needs and presented companies with
lower compliance risks than the one incorporated in SNC.
A legal question also arises, adding to risky sources of litigation. Neither the
Portuguese CIT Code nor TP regulations define the precise algebraic formula to
compute margin methods. The OECD Guidelines on TP, a primary doctrinaire source,
describe several profit level indicators, in the context of margin methods. The
Guidelines underline the operating nature of variables that should be included in these
indicators. Thus, the question emerges: is the EBIT computed by SNC rules an
unchallengeable operating variable to be accepted by tax courts in TP litigation? In our
view, that is not a closed case. If the tax law does not provide a definition of operating
income, and given trends observed in accounting and financial literature, and also in
OECD´s Guidelines, the question leaves room for interpretation. A gray area of
potential divergent views between firms and tax auditors can increase compliance
costs of taxation for Portuguese firms using TP.
Conclusion
The comparable uncontrolled price is a cornerstone in transfer pricing analysis for tax
purposes. While all comparability factors should be considered, the most important are
the similarity of products, contract terms, and economic/ market conditions. However,
in many real-life situations, the uncontrolled market prices are not observable.
28 Strategica 2016
Consequently, using margins, taken from samples of comparable firms, is a regular
phenomenon in TP compliance by firms.
Margins are derived from accounting numbers, with a special emphasis in operating
expenses and revenues. In Portugal, in recent times, we are faced with two
perspectives: one (POC) which placed great emphasis on the separation between
operational, financial and extraordinary phenomena. The other (SNC) that abandoned
the concept of extraordinary results, and seems to adopt the view that business
entities will have no such thing as “extraordinary” items. That means all phenomena or
facts that deserve accounting records would be due to the deliberate purpose of
managers, or to imponderables that a company is normally subjected, for simply
developing its activity in the continuous flow of economic environment. If, in the
literature, a marked line arguing for segregating several components that converge in
the net income, why did the SNC, which is in line with international accounting
standards, pursued a path that departed from this analytical trend? The SNC could
have adopted a more nuanced view instead of eliminating extraordinary or non-
recurrent items and include them in operating profit. Personally, we are not convinced
of the superiority of this new option, in comparison with what was established in POC.
For tax managers, tax consultants and tax auditors, the new accounting environment is
more uncertain, in the sense that TP compliance can be riskier. If one adds to this
picture the fact that courts are in many cases, not very prone to enter the intricacies of
accounting definitions, a riskier environment can be detected in Portugal.
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30 Strategica 2016
NEO PROTECTIONIST ACTIVITIES IN INTERNATIONAL TRADE
Tamta MIKABERIDZE
Ivane Javakhishvili Tbilisi State University
3 University St., Tbilisi, Georgia
mikaberidzetamta@gmail.com
Abstract. The purpose of the work is consideration and analysis of the effect of neo-
protectionist activities existing in the international trade on growth and/or decrease in
the international trade within the framework of World Trade Organization (WTO)
agreements; to what extent a particular non-tariff measure promotes or impedes
international trade turnover. That is a very important and relevant issue for developing
countries, including Georgia, the study of this issue should contribute to assessing risks
and possibilities in commercial diplomacy. In the work, WTO’s statistical data on tariff
and non-tariff barriers is studied and its analytical review is presented. To what extent
the trade liberalization measures taken within the framework of WTO contributed to
increasing of neo-protectionism; whether they really promoted the expansion of
international trade flows or not. The paper outlines the extent to which neo-protectionist
measures would be important and useful for the development or promotion of local
entrepreneurship; whether it is really better to apply them in comparison with tariff
barriers. Non-tariff barriers are mainly applied by developed countries against
developing ones, the reason for which is an aggravation of competition on the world
market, and the country is striving for the protection of national producers’ results from
that. Oftentimes unilaterally introduced non-tariff regulation measures give rise to a
whole chain of mutually restrictive actions. At the current stage, antidumping measures
through increasing duties are the main legal import limitation instrument for WTO
member countries. The number of antidumping investigations has been constantly
increasing in the recent years. Transfer of non-tariff protectionism to the level of trade-
economic groupings appears as another trend of its development. Within the framework
of numerous regional integration structures and inside bilateral trade agreements non-
tariff barriers are effectively applied both with respect to third countries and in member
countries’ mutual trade, and this takes place in conditions of significant liberalization of
customs taxation. The conclusions made in the work deal with what should be taken into
account by the countries in selecting a trade policy; how a concrete government should
make a decision in the process of establishing of trade barriers and what measure it
should opt for in a certain situation. It is a very important issue for the national
governments of developing countries, especially from the viewpoint of protection of
infant industries.
Keywords: Neo-protectionism; non-tariff barriers; antidumping; trade policy; WTO.
Introduction
International institutions ensure permanence and stability in the changing world, they
also create an interstate forum for consideration of their interests. Institutional,
regional and national initiatives laid the basis for numerous regional free trade
agreements, customs unions and regional cooperation arrangements in the whole
Economics 31
world, as well as special bilateral agreements with the purpose of settling such issues
as investments, export credits, double taxation, etc.
The world is developing with the intensification of integration processes, which means
the development of free trade. In view of such processes, developing countries are
guided by promotion and development of foreign trade. The World Trade Organization
and the trade system, in general, offer us a wider range of benefits. At the moment,
tariff and non-tariff barriers are at the lowest level in more than a 50-year history of
GATT/ WTO, and we all benefit from that: most of goods and services we have are a
result of import.
International trade stimulates economic growth. Economic growth, in its turn, means
the creation of additional workplaces, however, it is also true that some workplaces
are lost with the expansion of trade. Here we face two problems: first of all, the matter
concerns other factors – for example, technological progress has a great effect on
employment and production, it increases benefits and number of some workplaces
while impairing some others. On the other hand, the fact that trade clearly boosts the
national income (and welfare) does not always mean the creation of new workplaces
for those who lost their work as a result of competition with import. At the same time,
in some countries finding new jobs by workers requires a rather long period of time.
Facts also prove the extent to which protectionist policy contributes to unemployment
growth. In other words, an attempt to cope with the problem by trade restriction in the
short-run period turned into a greater problem in the long-run period (WTO, p.6).
Among topical issues for developing countries, including Georgia, is the effect of tariff
and non-tariff measures existing within the international trade on its growth or
shrinkage; how a concrete tariff measure promotes or impedes the international trade
turnover. Based on that, studying of the mentioned issue should contribute to the
assessment of risks and opportunities in commercial diplomacy.
Signing an agreement on the Deep and Comprehensive Free Trade Agreement (DCFTA)
between Georgia and the European Union has given a new impetus to the reforms in
the spheres related to foreign trade. It is noteworthy that DCFTA is one of the integral
parts of the Association Agreement, the purpose of which is to reach an agreement on
deep and comprehensive free trade with each partner country and assumption of
liabilities related to it. The agreement implies legislative harmonization and bringing
the practices existing in various spheres in accordance with the EU standards. The EU
requires from the Georgian government introduction of a new legislation and
regulations with the purpose of approximation of the Georgian produce’s quality to the
European standards, which will provide for its entry to the EU market.
Research method
The study is based on the analysis of statistical data on foreign trade, tariff and non-
tariff barriers contained in WTO’s annual reports; data and recommendations of the
UN Statistics Department, factual materials obtained from the National Statistics Office
of Georgia, the Ministry of Agriculture and many other organizations.
32 Strategica 2016
The scientific study is founded on the general methodological basis of analysis and
synthesis, abstraction, induction-deduction, and dialectics. Economic analysis and
statistical methods are applied to it. In particular: observation, collection-grouping,
analysis, graphic presentation of statistical information and other methods.
Tariff policy of the World Trade Organization
Trade policy should meet the country’s commercial interests. In general, the country’s
government is a direct participant in trade negotiations, but private firms are its real
clients. In other words, some companies may try to gain benefit in two (adverse) ways:
they ask for placing their products on the world market and, at the same time, convince
their own government to increase tariff barriers on the local market with the purpose
of protection against import. A big part of trade policy rhetoric has to do with the
professional interpretation of trade rules and agreement requirements.
Since the 1990s, within the framework of WTO, tariff liberalization has been taking
place at a quick pace in both developed and developing countries. Customs tariffs in
many developing countries are unstable since the countries have retained a possibility
for significant increasing of customs duties: in entering WTO they “tied” the rates of
customs duties at a high level but, in reality, they apply lower tariffs.
In view of the great difference in economy development level, a wide range of import
tariff average arithmetic values are characteristic of different country groups.
Developing countries with a comparatively low-income level apply for intensive
customs-tariff protection comparably more often. In some African countries (Sudan,
Tunisia, Morocco) the actual average tariff is 20% and higher. In oil producing
countries (Saudi Arabia, Kuwait, Qatar, etc.) and in the countries having industrial
potential and export capacities (The Philippines, the Republic of South Africa) import
customs taxation is almost the same as in developed countries, the actual average tariff
is within 5-10%. Average arithmetic tariffs in the majority of countries with growing
markets range from 10-15% (Brazil – 13.6%, China – 9.6%, India – 13.5%, Thailand –
11.6%). A comparatively high customs taxation indicator gives an opportunity to fulfill
protectionist tasks based on the interests of national production, as well as to
replenish the revenue part of the budget. Like in developed countries, production of
agricultural products in developing countries is under protectionist “umbrella” too.
The exceptions are Argentine and Brazil where average arithmetic tariff on agricultural
produce is fixed at a higher level. In Chile a uniform tariff level – 6% is set for all
products. Customs barriers for the agricultural product are especially high in Egypt,
where average arithmetic tariff indicator reaches 60.6%, Turkey – 42.2%, South Africa
– 40.4%, India – 33.4% and Morocco – 27.4%. Clothes, leathers, footwear,
transportation means, dairy products, sugar, and confectionery often appear in the
commodity groups with imposed customs tax rates largely exceeding the average
indicator for a given country. Along with the goods of the above-mentioned group, high
customs barriers are introduced for grain import in China (22.6%), tea and coffee – in
India (56.3%), fish and fish products – in Morocco (reduced from 46.6% to 14% in
2008-2014), in Tunisia (30.2%), etc. In a part of Asian and Arab countries very, high
customs taxes are introduced for alcoholic beverages and tobacco (in Egypt - 803%,
Malaysia – 103%, India – 69.1%) (WTO, 2015).
Economics 33
Relations with neighboring countries being our country’s main trade partners have a
crucial role in the process of foreign trade problematic study and strategy elaboration.
From this point of view, important for Georgia are Armenia and Azerbaijan with their
developing economies, as well as Russia, Ukraine, and Turkey which have growing
markets.
Entering WTO in 2000 Georgia assumed a number of obligations having to do with a
wide range of issues, such as licensing of entrepreneurial activities and export-import,
tax system, standardization-certification, sanitary and phytosanitary measures,
subsidization, intellectual property trade aspects, etc. Liberal foreign trade policy is
one of the basic principles of Georgia’s economic policy. The Georgian government has
carried out reformation of both the tariff policy and the technical regulation, as a result
of which Georgia currently has one of the most liberal foreign trade policies in the
world, which means a simplified foreign trade regime and customs procedures, low
import tariffs, and minimal nontariff regulation. According to WTO’s data, Georgia’s
simple average tariff makes up 1.5%, while on a worldwide scale it is in the range of
15-20% (Mikaberidze, 2016) (Figure 1).
Figure 1. Average Tariff Rate of Georgia (2005-2014)
(WTO World trade report 2006; 2009; 2012; 2015).
It is noteworthy that among Georgia’s main neighbor trade partners Armenia, Turkey,
Ukraine, and Russia are members of the World Trade Organization, while Azerbaijan
has the status of an observer. Accordingly, their customs-tariff regulation is adapted to
the norms widely introduced in the world practice. In the years of market reforms in
the majority of CIS (Commonwealth of Independent States) countries, a large-scale
liberalization of import regime was carried out, which resulted in customs tariffs
reduction, an increase in the number of non-taxable tariff items, drop in the number of
tariff peaks and non-ad valorem customs tax rates.
Table 1. Customs-tariff regulation (WTO, 2014; 2015)
Georgia Ukraine Russia Armenia Turkey Azerbaijan
Number of 10254 10481 11637 9658 16524 9956
MFN applied
tariff lines
Average 1.5 4.7 8.4 3.7 10.7 9.0
MFN applied
tariff rate
34 Strategica 2016
Average MFN 6.4 9.2 11.6 6.8 42.2 13.3
applied
agricultural
produce tariff
rate
Average 0.7 3.7 7.9 3.2 5.4 8.3
MFN applied
non-
agricultural
produce tariff
rate
The lowest average arithmetic import tariff after Georgia (1.5%) is in Armenia - 3.7%
and Ukraine - 4.7%. The highest is in Turkey – 10.7%, Azerbaijan – 9.0% and Russia –
8.4%. In all six countries tariffs on agricultural products are higher than on non-
agricultural ones: the especially significant difference is in Turkey between average
arithmetic tariffs on two extended product groups (36.80%) (WTO, 2014, 2013, 2012,
2009, 2008).
A comparatively low customs tax is set on the import of motor cars, mechanical
devices, electric appliances and electronics – on average, no more than 3% in Armenia,
Georgia; 5% - in Ukraine and Turkey. With the exception of Georgia, the countries have
above the average customs taxes on imported clothes, footwear, leather and textile
goods.
In the recent period, in contrast to the practice that existed in 1970-80s, developing
countries more often apply nontariff means for protection of the national production
and home market, which is related to the liberalization of trade regimes and
demonstrative effect of similar measures being taken by developed countries.
Neo-protectionism and antidumping policy within the framework of the World
Trade Organization
Any country prefers to export its products freely and without any restrictions,
however, it does not hurry to open its home market for free competition. According to
GATT’s terms, changing of once decreased tariff rates in the opposite direction is not
allowed. That is why in the implementation of their protectionist policy they put
increasingly more emphasis on application of nontariff barriers. For example, the
amount of subsidies allocated for local producers has been increasing since the 1980s;
cases of import prohibition of the goods that do not comply with strict standards are
increasing; administrative protractions during customs clearance become more
frequent; agreements on “voluntary” export restriction are concluded, etc. And all
these happens when the application of these measures is prohibited by GATT/WTO
rules.
If as a result of GATT’s activities customs taxes were decreasing, application of
nontariff barriers, on the contrary, was growing. This trend is known in the trade as
neo-protectionism or “new protectionism” (Grilli & Sassoon, 1990, p.11). Today about
2.7% of the total import of developed industrial countries is covered by the area of
application of nontariff measures, in the US – 42%. According to the UN classification,
Economics 35
nontariff measures can be of the following types: Sanitary and phytosanitary
measures; Technical barriers; Preliminary inspection of shipments and other
formalities; Price control measure; Licenses, quotas, bans and other quantitative
restriction measures; Taxes, premium and other nontariff measures; Antimonopoly
measures; Trade-related investment measures; Distribution bans; Bans on after-sale
service; Subsidies (except for export subsidies); Restrictions on state purchases;
Intellectual property; Rules of origin; Export measures (UNCTAD, 2010).
The reasons for neo-protectionism are related to cyclic factors (economic crisis,
exchange rate fluctuations, and high unemployment rates). Besides, they are related to
the governments’ attempts to raise international competitive ability of the national
production and protect interests of separate groups (Grilli & Sasson, 1990, p.11).
Anyway, that is related to the fact that producers profiting from import restrictions
protect their interests in the government in a more orderly way (for instance, by
means of trade unions) than consumers who, as a rule, come off as losers as a result of
trade barriers. Activation of the protectionist policy started in the US and Western
Europe in the mid-1970s. In these countries, a transfer from traditional protectionism
to selective protectionism was observed in individual sectors, which impedes
indiscriminate access of foreign goods to the home market. Foreign trade
protectionism became most vividly apparent in the agricultural sphere, particularly in
the European Union.
The statistics of nontariff measures being currently in force is very noteworthy. In
WTO’s annual report nontariff measures between member-states are divided into
three categories: 1. Measures clearly promoting trade; 2. Trade protection measures
and 3. Other trade-related measures. In 2013-2014 the total number of trade
promoting measures was 177, which increased by 70 units compared to the previous
year’s data (in 2012-2013 it made up 107 units); in 2013-2014 the total number of
trade protection measures was 337, which decreased by 18 units compared to the
previous year’s indicator (355); while other trade-related measures made up 168 units
and decreased by 22 units compared to 2012-2013 (190). Trade promotion measures
cover 6.4% of the world goods import, which makes up almost 1,8183.4 billion USD
(WTO secretariat). More than 80% of the mentioned measures are the result of tariff
reduction and are temporary ones. The main beneficiaries of the trade promotion
measures in the mentioned period were machine building, automatic devices, organic
chemistry products, steel and its products, plastic, animal fat and vegetable oil.
Most part of trade protection measures falls at antidumping measures – 267 units. 36
compensatory and 34 protective measures. As for other trade-related measures in
2013-2014, they made up 168 units, of which 119 were imposed on import, and the
remaining 9 – on export. Import restriction measures introduced by WTO members
covered a wide range of goods, mainly: iron and steel products, organic chemistry,
electronic machines and mechanical devices, textiles, clothes, and accessories, as well
as cinder and residuals (WTO secretariat).
Non-tariff barriers – primarily anti-dumping and compensatory measures,
subsidization, ecological, sanitary and phytosanitary regulation, technical standards,
voluntary export limitation mechanism – are mainly applied by developed countries
against developing ones, the reason for which there is an aggravation of competition
on the world market, and the countries` striving for protection of national producers
36 Strategica 2016
results from that. Trade contradictions arising between countries generate conflicts
that sometimes turn into prolonged trade wars. Oftentimes unilaterally introduced
non-tariff regulation measures give rise to a whole chain of mutually restrictive actions
(Financial Times, 2003).
Application of non-tariff barriers by developed countries expands following the
development of industrial production in a whole range of developing countries. This
kind of barriers are more intensively applied to knitted and weaved produce, footwear,
wood and cellulose-paper products, synthetic threads and fabrics, oil products, steel,
receivers, electronic computing machines, office and electric devices, motor cars,
watercrafts and other manufactured goods. A high level of nontariff restrictions on
developing countries’ agricultural produce export has been retained in the developed
countries (42,8%), while the frequency of application of nontariff barriers for
individual products is even higher: fish and shellfishes (from 50 to 63%), grain crops
(from 65,5 to 82,3%) (Baccetta & Bora, 2001, pp.44-47).
Developed countries’ export, in its turn, faces much lower nontariff barriers on
developing countries’ market, first of all, with respect to agricultural and fish products,
medicaments, transportation means (buses and passenger cars), oil and oil products.
Application of nontariff regulation measures between developing countries depends
on the level of their socio-economic development and the extent of their integration
into the international division of labor according to individual types of products.
It is important that the highest nontariff barriers are encountered by the least
developed countries’ exporters with respect to the products which are most
interesting for them (fish, shellfish, fruit, nuts, coffee, grain crops and other
agricultural products, as well as textiles, wood). That concerns practically all regions,
especially the US, the EU, Japan, Canada, Central Asian and North African countries. At
the same time, less developed countries don’t often resort to nontariff regulation
measures. They actively protect their markets against agricultural and fish products
that are exported by them. As for manufactured goods, except for remedies and
medicaments (47,7%), oftentimes the frequency of application of nontariff measures
does not exceed 1%, sometimes it ranges from 2 to 5-7% (WTO).
In the framework of the Association Agreement signed with the European Union
(Agreement on Deep and Comprehensive Free Trade Area - DCFTA), Georgia is
developing the national quality infrastructure in accordance with the international and
EU standards. About 98% of the standards approved by Georgia are either
international or comply with the EU ones. Georgia signed several agreements regional
trade agreements dealing with sanitary and phytosanitary issues. According to Chapter
IV of the DCFTA, the EU and Georgia assume the obligation to ensure: transparency of
sanitary and phytosanitary measures; approximation of the Georgian legislative
system to the EU laws; subsequent implementation of the WTO agreement’s principles
regarding sanitary and phytosanitary measures; in the recent period (2009-2015)
there were not any problems among WTO members in the Technical Barriers to Trade
Committee concerning Georgia’s technical regulations (WTO TBT).
In the 1990s, there was an intensification of antidumping activities of those numerous
countries that eased their import regimes. That can be explained by the fact that
antidumping procedures are an important tool for supporting national production
Economics 37
disadvantaged by cheap import. At the current stage, antidumping measures through
increasing duties are the main legal import limitation instrument for WTO member
countries. The aim of this policy is the eradication of unfair price-related competition
with respect to producers in the importing countries. The number of antidumping
investigations has been constantly increasing in the recent years (Figure 2).
Figure 2. The number of antidumping investigations (1995-2014)
(WTO, http://wto.org/english/tratop_e/adp_e/adp_e.htm)
The level of antidumping investigations in the world is high again. In 2014
antidumping investigations were initiated against 41 countries. Among them, most of
all against China (63 cases). Figure 3 shows the countries against which more than 30
investigations were initiated in 2000-2014.
Figure 3. The number of antidumping initiations against countries (2000-2015)
(WTO, http://wto.org/english/tratop_e/adp_e/adp_e.htm)
38 Strategica 2016
It is noteworthy that 5 countries out of the ones given in figure 3 are Georgia’s main
import partners. It is also worth mentioning that Georgia has not initiated any
dumping investigations in the recent years. Moreover, up to now Georgia has no
antidumping legislation. The country finished work on the antidumping bill at the end
of the last year, sent it to the EU’s respective office and now is waiting for a reply as for
its compliance with the EU principles. Adoption of the law will be a step forward in
protecting local entrepreneurs against unfair competition.
It is noteworthy that it is not developed countries (in contrast to the past) that are
mainly found to be involved in dumping activities but developing ones (which are
constantly criticizing the antidumping policy of developed countries as a form of
protectionism, by means of which they discriminate developing exporting countries).
The spread of antidumping practice is closely associated with developing countries’
strong desire to restrain competition on the part of import produce, for which they
eliminate main trade barriers.
Transfer of non-tariff protectionism to the level of trade-economic groupings appears
as another trend of its development. Within the framework of numerous regional
integration structures and inside bilateral trade agreements non-tariff barriers are
effectively applied both with respect to third countries and in member countries’
mutual trade, and this takes place in conditions of significant liberalization of customs
taxation.
According to WTO’s studies, countries taking part in customs unions and agreements
on free trade zones try to unify nontariff regulation measures currently existing within
the integration framework and gradually lift them. As a rule, this kind of agreements
cover the entire industrial goods and individual kinds of agricultural products.
The lifting of quantitative import restrictions is possible right after the agreement’s
entry into force, during a certain period of time or with respect to individual kind of
goods. Rules of subsidization and state assistance to producers are usually described in
general “non-impeding free competition” terms and their application is only specified
in some regional trade agreements. A possibility of the introduction of emergency
protective measures for national producers is associated with special threat emersion
conditions and they are quite widely applied within the framework of many
integrations. Most of the regional agreements forbid application of antidumping and
compensatory measures inside a group or require preliminary consultations between
the interested parties and the necessary period of time for dispute settlement. Only
2/3 of regional trade agreements restrict the application of technical standards and
1/3 – use of sanitary and phytosanitary measures. Organization member states try to
impede third countries’ competitive import. In this case, the impact of nontariff
regulation essentially increases, first of all, due to the consolidation of positions of the
countries participating in the international trade and their economic and political
strengthening.
The main tasks of customs-tariff regulation at the modern stage of Georgia’s economic
development are as follows:
- Promotion of the economy’s modernization by means of simplification of Georgian
companies’ access to advanced foreign equipment and technologies.
Economics 39
- Stimulation of production’s competitive ability on the home and world markets and,
hereupon, diversification of the national economy’s structure and formation of a
renewed specialization of the country’s foreign trade with the purpose of its more
effective inclusion into the world economy.
- Creation of favorable conditions for the development of the production that provide
for employment, stability and the country’s economic security (agricultural sector,
food, pharmaceuticals, textile industry and other sectors).
- Optimization of import’s geographical structure.
Conclusion
The countries’ economic integration agreements are considered effective if they lead to
real growth in trade turnover. Measures taken by the government or a non-
governmental organization in the sphere of international trade, in particular – mutual
trade liberalization, harmonization of certain spheres, concrete single policy, lifting of
customs duties and quantitative restrictions, introduction of a single external tariff
inside the partnership should lead to impressive results from the viewpoint of growth
and expansion of trade flows.
The introduction of competition regulation rules on an international scale contributes
to the most effective distribution of resources and, as a result, to global efficiency of
production, which impacts on directions of trade flows, as well as geographic and
goods structure. It should be also stressed that intensification of the EU’s integration,
whose economic policy is aimed at regulation of both trade and competition, makes it
possible for the countries to considerably extend mutual trade, which is one of the
factors of economic growth.
Trade liberalization carried out by GATT/ WTO resulted in significant reduction of
tariffs and lifting of a number of nontariff barriers between the member states, which
contributed to significant growth in the volume international trade. At the same time,
antidumping regulations envisaged by WTO often act as protectionist measures. With
the purpose of reducing negative effects of activities of international monopolies and
cartels, the issue of adopting regulations in the international competition policy is
considered within the framework of WTO at a new stage.
Types of international trade policy are not static, they undergo evolutionary
development together with the development of the world economy – realization of
neo-protectionism takes place at a new global level. The peculiarity of application of
technical, sanitary and phytosanitary nontariff measures is that common criteria for
trade regulation by these measures are still in the process of elaboration, and in
practice, there are various approaches to import restriction. For example, the EU
actually imposed a general moratorium on importing raw materials for manufacturing
genetically modified food products, feedstuff, and finished food products, while the US,
Canada, and some other countries only regulate importing of these potentially
hazardous products to their territory. Application of nontariff measures can be based
on various factors; the main point is that these measures must be justified and
correctly aimed, but not at retaliation to the actions taken by the partner countries.
40 Strategica 2016
Against the background of great capabilities of nontariff restriction mechanisms, it is
necessary to stress that they should be mainly aimed at temporary application, based
on the interests related to ensuring the competitive ability of domestic producers, and
not only as directed by WTO rules. Excessively prolonged protection against fair
foreign competition may have a negative effect on the activities of local companies, not
to speak of interests of domestic producers that will be harmed in terms of import
restriction and, accordingly, competition on the home market.
Today protectionism and free trade are not contradictory principles of economic
policy, but two interrelated ways of regulation of interstate relations. With the purpose
of maximally effective inclusion of national economies into world economic relations, it
is necessary to optimally combine these two ways of economic regulation and to
balance liberalization of foreign trade with rational protectionism.
DCFTA gives Georgia an opportunity to carry out further trade policy related reforms
aimed at overcoming nontariff barriers, particularly from the viewpoint of hygienic
standards for agricultural products, approximation of the regulations on manufactured
goods to the international standards, protection of intellectual property rights on the
border, approximation of the state purchases rules and the service sphere to the EU
standards. Georgia will be obliged to bring the quality of its produce into compliance
with the established EU requirements not only in exporting products but also in the
case of consumption inside the country. All this implies the process of improvement of
sanitary and phytosanitary standards, protection of intellectual property rights,
perfection of competition and technical regulations on industrial products as well as
the promotion of customs and trade procedures.
References
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42 Strategica 2016
ICT SECTORAL SPECIALIZATION AND CONCENTRATION IN V4+
COUNTRIES ON REGIONAL LEVEL (NUTS2)
Kamila TUREČKOVÁ
Silesian University in Opava
Univerzitni namesti 1934/3, 733 40 Karvina, Czech Republic
tureckova@opf.slu.cz
Abstract. This article focuses on economic specialization in context of regional
competitiveness of the regions of Visegrad group countries plus defined on regional level
by NUTS2, and on spatial concentration of the selected economic activity, which is
Information and communication technology characterized by NACE, Rev. 2 through
section J. The presented research tries to define the position of Information and
communication technology sector and its development in Poland, the Czech Republic,
Slovakia, Slovenia, Austria, and Hungary in the period 2005 – 2012 using Gross Value
Added data. The analysis of ICT sectoral specialization and concentration in V4+
countries will be made on a regional level based on empirical data from the European
statistical office, Eurostat. Standard economic-geographical methods and statistical
measures of specialization and concentration are applied and combined. Specialization
and concentration are calculated using Herfindahl index for concentration, the
Herfindahl index for specialization, Krugman dissimilarity index for concentration and
specialization, Specialization index and Localisation index. The text after Introduction is
organized subsequently: the second part explains the theoretical approach and
methodology. There are introduced generally used methods for calculating sectoral
specialization and concentration. The third part contains the conceptual framework of
empirical analysis and results of ICT sector in V4+ regions in the context of concentration
and specialization and the Conclusion highlights some major conclusions of detailed
analysis made in the previous chapter. It was discovered through the selected types of
methods that in all six analyzed countries ICT activities were concentrated in the same
region in which the capital city of the given country is situated. Slovakia had the most
balanced representation of the ICT sector from all regions V4+ countries.
Keywords: ICT sector; specialization; concentration; index; region; regional
competitiveness; comparison.
Introduction
Sectoral regional specialization and geographical concentration of sectors are two
closely interrelated phenomena since they reflect the similar reality base on the
identical production structures. It is two sides of the same coin (Aiginger & Rossi-
Hansberg, 2006). Regional specialization in the context of economic sector expresses
the share of regionally selected sector in the sector of the overall economy while the
geographical concentration of the specific economic sector reflects the distribution of
its regional shares.
The high level of specialization in the sector is reflected in sector´s competitiveness
what is defined as the ability of the particular economic sector to defend and/or gain
Economics 43
market share in open international markets, relying on price and/or quality of their
products (European Commission, 2004). If we add the concept of external
competitiveness of the economic sectors to the concept of internal aggregate
competitiveness, the “strong” sector is reflected in a positive trajectory of the main
macroeconomic indicators with an emphasis on productivity, which sustained growth.
This growth is a prerequisite for achieving positive results at the macroeconomic level.
There is no doubt that the geographical specialization in any economic sector brings,
either directly or indirectly, significant economic and social benefits for the particular
economy and society (Turečková, 2016).
The aim of this article is to evaluate the Visegrad group countries plus (V4+) regions in
the context of their regional sectoral specialization and geographical concentration
concerning the economic branch of Information and communication technology (ICT)
characterized by NACE Rev. 2. To define the regional disparities in the relevant sectors
an empirical result was used. This analysis was performed for the period 2005 through
2012 based on the Gross Value Added data of the economic sector and the NUTS2
region provided by Eurostat. The selected methods including the traditional economic-
geographical methods were used, such as the Herfindahl index for concentration, the
Herfindahl index for specialization, Krugman dissimilarity index for concentration and
specialization, Specialization index or Localisation index) to express territorial
specialization and geographical concentration. These methods are supplemented by
ordinary statistical methods such as the standard deviation method and others.
The article is organized as follows. Section 2 describes the theoretical approach
towards the regional specialization and geographical concentration with an emphasis
on the main theoretical contributions to this problem and methodology that measures
its sectoral level, specifically in the ICT sector, in NUTS2 regions of Poland, the Czech
Republic, Slovakia, Slovenia, Austria, and Hungary. The Section 3, Empirical analysis of
ICT sector in V4+ regions in the context of concentration and specialization, presents
concrete basic empirical results on economic specialization and geographical
concentration of ICT in particular regions of the selected countries in years 2005 to
2012. It also provides us with a comparison between analyzing the regions and
determining the order of the regions in its specialization in ICT sector. The Section 4,
the conclusion, provides us with concluding comments, and it highlights some of the
major conclusions from the analysis provided.
Theoretical approach and methodology
Regarding the methodological perspective, the current research is based on economic-
geographical methods that are part of Economic geography. The discipline (New)
Economic Geography was strengthened in the 1990s as a synthesis of the new theory
of trade, Myrdal, respectively Hirschman theory of cumulative causes and neoclassical
location theory (Baldwin, Forslid, Martin, Ottaviano & Robert-Nicoud, 2005; Šimanová
&Trešl, 2011).
The possibility to define and measure geographical specialization and sectoral
concentration allows us to focus on regional specialization and industrial
concentration in the context of relevant microeconomic and macroeconomic analysis
of the economy in particular region. Krugman and Venables (1995) consider
44 Strategica 2016
transaction costs as the key role in the geographical advantage of localities, when the
first step leads to a greater economic integration and differentiation of regions, which
alternates with the second phase of the dispersion of economic activities in peripheral
regions, including related changes in the industry structure. Hirschmann (1967) cited
in Blažek and Uhlíř (2002) considers the basis of sectoral regional disparities in
available infrastructure and developed service sector. There is an obvious causality of
the actual process of agglomeration of economic activities and regional economic
policy in the areas, which support new investments (investment incentives, industrial
zones, subsidies of new jobs). Not only the regional economic policy but also foreign
direct investment is very important (Srholec, 2004). A significant regional
specialization in a particular economic sector is an advantage not only in the relevant
region but also for the hierarchically higher geographical area. There is no doubt that
the geographical specialization and sectoral concentration bring, either directly or
indirectly, significant economic and social benefits for the particular economy and
society.
The concept of competitiveness is based on regional competitiveness in combination
on sectoral competitiveness. This sectoral competitiveness is also transformed on
microeconomic level where, for example, ICT has a positive effect on the international
competitiveness of firms (Pena-Vinces, Capeda-Carrion & Chin, 2012). Muntean, Nistor,
and Nistor (2015) emphasize a role of ICT for the firms in the example of firms in
services sector when firms using appropriate information and communication
technologies reaching increasing competitiveness and operational efficiency in
particular business.
Regional competitiveness is a reflection of the quantity and quality of the structure of
economic entities and subjects in the region (Nevima, 2014). These allow the region to
be in the desired area (in the required field) better than others do. Regional
competitiveness is a combination of Theory of comparative advantage (Ricardo, 1956),
Porter's concept of competitive advantage (Porter, 1990) and Theory of X-inefficiency
(Leibenstein, 1966). Competitiveness of the sector of the economy is also supported by
the inherent "the attractiveness of the sector in the country" where the sector or
country have a set of elements, characters, relationships and characteristics, which
enables them to overcome others in the ability to generate higher national income and
attract more permanent factors of production (Turečková, 2014). This attractiveness
of the sector usually has a form called "soft externalities" (Benes, 2006). According to
Kitson, Martin and Tyler (2004), referring to Alfred Marshall, these benefits are
characterized by a triad of externalities which is comprised of a skilled workforce,
supporting and related industries and transfer of knowledge, experience, and
information. This creates a "special atmosphere", supported by the existence of public
goods (knowledge, skills, common information), which creates conditions for the
formation of wanted mostly - positive externalities reducing costs. This dynamic
information dissemination, knowledge, technological processes and practices and
innovation improves the competitiveness of the system itself (for example sectors as
defined) and is reflected in the growth of competitiveness of businesses and other
entities participating in it.
The subject of our research is the economic sector of ICT defined by the NACE Rev. 2
(Nomenclature générale des Activités économiques dans les Communautés
Européennes), which defines the complete system of classifications of economic
Economics 45
activities and products used by the European Union and creates a framework for
statistical data on economic issues used for the statistics generated throughout the
entire European Union. The ICT sector is defined in the NACE Rev. 2 in Section J -
Information and communication activities (services); (Information and
Communication) (CSO, 2014). ICT sector is analyzed in the regions of a group of
countries known as V4+. This specific group of countries includes Poland, the Czech
Republic, Slovakia, Slovenia, Austria, and Hungary. The territorial definition of the
regions is based on a uniform system of classification of territorial statistical units
NUTS (Nomenclature of Territorial Units for Statistics - Nomenclature of Territorial
Units for Statistics), which is predominantly used for statistical purposes in the EU. The
regional level NUTS2 was used for the purpose of our analysis (MMR, 2015).
The period in which the analysis was performed covers the years 2005 - 2012. The
data used in this paper are not available for a longer period. The data regarding Gross
Value Added (GVA) applied basic prices of all NACE activities in ICT sector, and
population number, all for NUTS2 regions. The empirical calculation is based on take-
over public data from Eurostat (Database of General and regional statistics; Regional
statistics by NUTS classification). The data regarding sectoral employment were not
available and thus could not be used. The software used was MS Excel. All calculations
and graphical analysis are author´s own work.
Applied methods
The analysis of concentration and specialization of ICT sector in NUTS2 regions of V4+
is primarily based on the Herfindahl index for concentration, the Herfindahl index for
specialization, Krugman dissimilarity index for concentration and for specialization,
Specialization index, and Localisation index.
The first statistical measuring methods used here are the well-known indicators of
concentration and specialization – the Herfindahl index for concentration ( ) and for
specialization :
(1)
or
(2)
where
(3)
and where i – region; j - sector (branch); X – total (national) gross value added (GVA);
Xij - GVA in sector j in region i; Xj - total GVA in sector j; Xi - total GVA in region i; –
the share of region i in the total national value of branch j; – the share of branch j in
the total value of region i.
46 Strategica 2016
Both Herfindahl indexes increase with the degree of regional sectoral concentration
or specialization. If the value of index equals 1, the sector j is entirely concentrated in
one region i, which means that the region i specializes in only one economic sector. The
lower limit values are defined as 1/n for concentration and 1/m for specialization, i.e.
all regions (sectors) have an equal share in sector j, respectively in region i. It is
necessary to calculate with equally large regions to preserve the comparability and
objectivity since the size of the region influences the final value of the index. For more
information about the statistical measurement of concentration and specialization by
Herfindahl index see Campos (2012), Goschin, Constantin, Roman & Ileanu (2009) or
Rhoades (1993).
The second group of indicators applied is the well-known Krugman dissimilarity index
for concentration ( ) or for specialization :
(4)
or
(5)
where
(6)
The Krugman Dissimilarity Index is a relative measure of specialization or
concentration that is applied to compare one economic sector/region with the overall
national economy. Its values range from 0 to resp. . If the index equals 0,
it means identical territorial/sectoral structures, while if the value of index equals max
limit, it demonstrates totally different sectoral structures in the analyzed unit (Goschin
et al., 2009; Palan, 2010; Turečková & Martinát, 2016)
The third indicator applied in the present research is Specialization index ( ) that
combines both of Herfindahl indexes as is shown in Equation (7):
(7)
Specialization index measures the share of the regional sectoral characteristic in the
total sectoral characteristic of the hierarchically higher territorial unit. .
If the numeric value is close to 0, the relevant sector is not located within the analyzed
region, and if ISij = 100, the sector is located entirely in this region, so the particular
economic activity is concentrated there and this region (no other) specializes in this
sector.
The last indicator measuring territorial concentration is Localisation index ( ), also
known as Localisation quotient, Proportionality index or Coefficient of concentration),
take into consideration the population number in the relevant regions. The localization
index is constructed based on this formula:
Economics 47
(8)
where Si – population in region i; S – total population
Localization index takes values around one. When ILij = 1, it means that the economic
sector is located proportionally in this region. If ILij > 1, it indicates over-proportionate
representation of the analyzed sector in the region (in relation to its population), and
vice versa ILij < 1, it indicates under-proportionate representation of the analyzed
sector in the selected region (in relation to its population). More about Specialization
and Localisation index in Turečková and Martinát (2016).
The limitations of used methods are (I) amount of input indicators, (II) availability of
sources of indicators on required regional level and (III) methodology of assigning a
value of particular production of economic subjects in a particular region. The indices
used are based on the amount of GVA, which may not always be the only indicator
reflecting the concentration of sector in the region. In the context of sectoral
concentration it is also preferable to find it out on lower regional levels but for LAU 1
and LAU 2 data are not available. GVA value produced by the firm is assigned to the
region where the company has its registered office and not to the region where the
value of GVA actually have been produced.
The presentation of the results of the analysis is highlighted by using the semaphore
method (traffic light method). More about the different types of rating
scales/conditional formatting regarding the highlighting differences in result values
see for example Melecký and Skokan (2011) or Tuleja (2010).
Empirical analysis of ICT Sector in V4+ Regions in context of concentration and
specialization
Here are present the results of sectoral specialization in selected regions NUTS2 of V4+
country. In the context of theoretical approach, it is claimed that regions with a higher
level of specialization and concentration in particular sector have in this economic
sector also its competitive advantage.
Table 1 summarizes the relevant values of both found Herfidahl indexes for ICT sector
for NUTS2 regions of V4+ countries between years 2005 – 2012. Based on the
Herfidahl index for concentration, the ICT sector is significantly concentrated in the
regions of the capital city. In 2012, about 60% of analyzed economic activities were
concentrated in Prague, in Közép-Magyarország it was more than 80%, in Wien it was
62%, in Poland Region Mazowieckie it was 53%, in Zahodna Slovenija it was about
80% and in Bratislava Region only 32%. It was merely in Slovakia regions where the
ICT sector was not concentrated specifically in one territorial unit but considerably
expanded into all regions: Západné Slovensko (regional share of ICT in total ICT
activities was about 25%), Stredné Slovensko (21%) and Východné Slovensko (22%).
No other regions were involved in ICT activities by more than 20% during the selected
time period. The regions where ICT was not represented at all are Burgenland,
Swietokrzyskie, Podlaskie, Lubuskie and Warminsko-Mazurskie (their share of ICT in
total ICT sector is lower than 1.5%). The results, which were obtained applying the
48 Strategica 2016
Herfidahl index for specialization, confirm sectoral orientations of each region, which
can be seen in the second part of Table 1. Prague was the most specialized in ICT (ICT
includes more than 12% of all economic activities) followed by Mazowieckie (9%-
10%), Közép-Magyarország (9%) and Wien (8%). There were 12 NUTS2 regions
where ICT was represented by less than 2% in 2005 and 20 regions in 2012.
Accordingly, a process of gradual specialization of ICT activities in some regions can be
noticed.
Table 1. Values of Herfindahl index for concentration and specialization, 2005 – 2012,
NUTS2 in V4+
Economics 49
Krugman dissimilarity indexes in the present analysis compare an economic structure
of single region with the economic structure of the reference level (i.e. the particular
country in this case). Picture 1 shows eight average values of the Krugman index of
concentration and specialization in each region. The lower value of the index of
concentration (close to zero) states that ICT sector in the particular region resembles
the ICT structure of the whole country. The results following from Krugman index of
concentration in NUTS2 regions of V4+ confirm that only in regions with the capital
city the ICT sector is much largely represented compared to what is typical (average)
for the overall national economy. The consistency of results of indexes in both
Slovenian regions is caused by the existence of merely two regions within the analyzed
country. A similar explanation can be applied in the case of Krugman index of
specialization. The value of this index indicates the similarity of the regions towards
the reference region (formed by their average) regarding the specialization in ICT
activities. There are also results confirming the previously mentioned conclusions.
Figure 1. Values of Krugman dissimilarity indexes, average 2005 – 2012, NUTS2 in V4+
Table 2 presents us with values of Specialization index, its average and rank of NUTS2
regions based on average data. The higher the index value, the higher amount of ICT
activities in the particular region can be noticed (note: the size of the total output of
the particular economic sector together with the output of the whole economy (all
sectors) is taken into account. From this perspective, different regions could be
relevantly compared with each other). The most successful region as far as the
participation in ICT activities is Prague, followed by Közép-Magyarország region, Wien,
Mazowieckie, Zahodna Slovenija, Bratislava Region and the rest of Slovak regions,
Southeast, Vzhodna Slovenija, Malopolskie, Northeast, Pomorskie and Wielkopolskie
(15 places). Five Polish regions (Swietokrzyskie, Podlaskie, Lubuskie, Opolskie and
Warminsko-Mazurskie) and two Austrian (Burgenland and Vorarlberg) regions are
engaged in ICT activities only marginally and contributed the least to the ICT sector.
Table 2. Values of Specialization index, 2005 – 2012, average and rank, NUTS2 in V4+
GEO/TIME 2005 2006 2007 2008 2009 2010 2011 2012 Average Rank
Czech Republic
Praha 6,720 7,686 8,352 7,088 6,991 7,019 7,587 7,439 7,360 1
Strední Cechy 0,062 0,077 0,068 0,095 0,086 0,060 0,052 0,050 0,069 28
Jihozápad 0,194 0,180 0,133 0,129 0,121 0,107 0,105 0,081 0,131 19
Severozápad 0,118 0,093 0,077 0,135 0,137 0,129 0,106 0,106 0,113 21
Severovýchod 0,213 0,186 0,173 0,260 0,283 0,258 0,237 0,219 0,228 13
Jihovýchod 0,320 0,301 0,334 0,392 0,472 0,457 0,465 0,563 0,413 10
50 Strategica 2016
Strední Morava 0,090 0,067 0,080 0,056 0,068 0,058 0,045 0,053 0,065 29
Moravskoslezsko 0,166 0,137 0,111 0,147 0,179 0,173 0,172 0,167 0,157 18
Hungary
Közép-Magyarország 6,255 6,223 6,454 6,501 8,046 7,569 7,277 7,461 6,973 2
Közép-Dunántúl 0,072 0,078 0,072 0,061 0,037 0,032 0,036 0,038 0,053 34
Nyugat-Dunántúl 0,096 0,121 0,124 0,120 0,057 0,052 0,056 0,050 0,085 25
Dél-Dunántúl 0,102 0,103 0,114 0,110 0,065 0,065 0,049 0,048 0,082 26
Észak-Magyarország 0,082 0,080 0,082 0,075 0,032 0,031 0,038 0,031 0,056 32
Észak-Alföld 0,102 0,096 0,114 0,112 0,056 0,062 0,067 0,073 0,085 24
Dél-Alföld 0,142 0,123 0,124 0,119 0,050 0,055 0,061 0,073 0,093 23
Austria
Burgenland (AT) 0,027 0,028 0,025 0,019 0,015 0,017 0,021 0,019 0,021 43
Niederösterreich 0,070 0,071 0,067 0,072 0,075 0,076 0,078 0,081 0,074 27
Wien 6,529 6,121 5,832 5,596 5,423 5,251 5,277 4,914 5,618 3
Kärnten 0,038 0,055 0,053 0,053 0,050 0,049 0,054 0,045 0,050 35
Steiermark 0,087 0,084 0,096 0,094 0,097 0,098 0,105 0,116 0,097 22
Oberösterreich 0,135 0,144 0,141 0,138 0,150 0,163 0,187 0,214 0,159 17
Salzburg 0,041 0,043 0,050 0,053 0,052 0,061 0,072 0,107 0,060 31
Tirol 0,040 0,042 0,040 0,049 0,052 0,048 0,050 0,051 0,047 37
Vorarlberg 0,024 0,021 0,023 0,024 0,024 0,022 0,022 0,021 0,023 41
Poland
Lódzkie 0,057 0,053 0,062 0,059 0,057 0,055 0,050 0,050 0,055 33
Mazowieckie 6,407 5,934 5,126 5,499 4,998 4,956 4,811 4,918 5,331 4
Malopolskie 0,169 0,220 0,238 0,249 0,268 0,219 0,226 0,241 0,229 12
Slaskie 0,177 0,177 0,192 0,176 0,180 0,151 0,142 0,152 0,169 16
Lubelskie 0,048 0,043 0,047 0,043 0,041 0,038 0,031 0,036 0,041 38
Podkarpackie 0,030 0,029 0,049 0,075 0,076 0,082 0,071 0,069 0,060 30
Swietokrzyskie 0,026 0,020 0,021 0,021 0,019 0,017 0,016 0,015 0,019 44
Podlaskie 0,022 0,020 0,021 0,019 0,019 0,016 0,016 0,013 0,018 45
Wielkopolskie 0,156 0,152 0,185 0,195 0,203 0,190 0,207 0,157 0,181 15
Zachodniopomorskie 0,052 0,048 0,047 0,055 0,053 0,046 0,041 0,039 0,048 36
Lubuskie 0,027 0,024 0,025 0,022 0,023 0,019 0,018 0,017 0,022 42
Dolnoslaskie 0,098 0,092 0,106 0,112 0,134 0,130 0,128 0,143 0,118 20
Opolskie 0,016 0,014 0,014 0,011 0,012 0,009 0,008 0,007 0,011 46
Kujawsko-Pomorskie 0,044 0,038 0,043 0,041 0,038 0,031 0,025 0,024 0,035 39
Warminsko-Mazurskie 0,035 0,024 0,025 0,025 0,023 0,020 0,019 0,018 0,024 40
Pomorskie 0,234 0,239 0,225 0,202 0,198 0,166 0,174 0,187 0,203 14
Slovenia
Vzhodna Slovenija 0,305 0,299 0,295 0,328 0,338 0,358 0,373 0,368 0,333 11
Zahodna Slovenija 4,735 4,801 4,805 4,702 4,488 4,663 4,660 4,932 4,723 5
Slovakia
Bratislavský kraj 1,464 1,793 1,952 1,947 2,146 2,008 1,780 1,820 1,864 6
Západné Slovensko 0,717 0,644 0,678 0,742 0,842 0,674 0,728 0,842 0,733 9
Stredné Slovensko 0,808 0,758 0,747 0,698 0,938 0,941 0,928 1,068 0,861 8
Východné Slovensko 1,035 0,950 0,965 0,858 1,007 1,126 1,225 1,161 1,041 7
The values of localization index make regional sectoral concentration more accurate in
the context of the level of population density. These values are shown in Table 3 and
are supplemented by graphs for each country. The regions with an index higher than 1
(regions with capital cities) are characterized by the over-proportional representation
of the ICT activities, and vice versa. From this point of view, the ICT sector was on
average the lowest in Central Bohemia and Central Moravia in the Czech Republic,
Észak-Magyarország and Észak-Alföld in Hungary, Niederösterreich and Burgenland in
Austria, Opolskie and Podlaskie in Poland, Vzhodna Slovenija in Slovenia and Western
Slovakia in Slovakia. For these regions, under-proportional representation of ICT
activities is typical compared to the nationwide situation
Economics 51
Table 3. Values of Localisation index, 2005 – 2012, average, graphs, NUTS2 in V4+
Aver
GEO/TIME 2005 2006 2007 2008 2009 2010 2011 2012 age
Czech Republic
Praha 5,118 5,357 5,545 5,131 4,979 5,053 5,147 5,070 5,175
Strední Cechy 0,324 0,357 0,328 0,386 0,352 0,296 0,274 0,269 0,323
Jihozápad 0,566 0,535 0,441 0,430 0,416 0,399 0,392 0,347 0,441
Severozápad 0,421 0,365 0,324 0,430 0,435 0,425 0,383 0,384 0,396
Severovýchod 0,503 0,460 0,434 0,531 0,548 0,536 0,513 0,493 0,502
Jihovýchod 0,596 0,568 0,591 0,647 0,704 0,704 0,713 0,797 0,665
Strední Morava 0,345 0,291 0,313 0,267 0,293 0,276 0,246 0,267 0,287
Moravskoslezsko 0,483 0,428 0,380 0,445 0,479 0,486 0,493 0,490 0,461
Hungary
Közép-Magyarország 2,666 2,654 2,644 2,642 2,873 2,828 2,775 2,792 2,734
Közép-Dunántúl 0,350 0,355 0,336 0,306 0,223 0,218 0,238 0,244 0,284
Nyugat-Dunántúl 0,437 0,491 0,478 0,468 0,309 0,313 0,333 0,312 0,392
Dél-Dunántúl 0,378 0,375 0,383 0,382 0,289 0,294 0,261 0,256 0,327
Észak-Magyarország 0,290 0,283 0,279 0,264 0,168 0,171 0,192 0,170 0,227
Észak-Alföld 0,290 0,278 0,295 0,293 0,207 0,223 0,238 0,241 0,258
Dél-Alföld 0,379 0,346 0,336 0,334 0,211 0,226 0,247 0,267 0,293
Austria
Burgenland (AT) 0,381 0,393 0,378 0,328 0,300 0,320 0,354 0,344 0,350
Niederösterreich 0,287 0,294 0,293 0,307 0,312 0,316 0,315 0,324 0,306
Wien 3,490 3,409 3,354 3,313 3,285 3,234 3,160 3,047 3,287
Kärnten 0,362 0,440 0,447 0,450 0,438 0,437 0,454 0,418 0,431
Steiermark 0,383 0,382 0,419 0,418 0,426 0,430 0,440 0,469 0,421
Oberösterreich 0,468 0,491 0,496 0,498 0,518 0,546 0,581 0,627 0,528
Salzburg 0,450 0,469 0,522 0,536 0,533 0,590 0,632 0,781 0,564
Tirol 0,374 0,389 0,386 0,425 0,440 0,426 0,426 0,437 0,413
Vorarlberg 0,396 0,379 0,401 0,419 0,414 0,402 0,399 0,383 0,399
Poland
Lódzkie 0,420 0,414 0,455 0,441 0,438 0,441 0,427 0,425 0,433
Mazowieckie 4,077 4,022 3,789 3,823 3,729 3,830 3,817 3,842 3,866
Malopolskie 0,631 0,742 0,779 0,785 0,820 0,758 0,784 0,801 0,763
Slaskie 0,594 0,603 0,638 0,606 0,618 0,586 0,580 0,592 0,602
Lubelskie 0,366 0,351 0,376 0,357 0,350 0,347 0,316 0,341 0,351
Podkarpackie 0,300 0,302 0,394 0,480 0,486 0,521 0,493 0,481 0,432
Swietokrzyskie 0,367 0,336 0,351 0,346 0,327 0,318 0,310 0,301 0,332
Podlaskie 0,345 0,332 0,346 0,328 0,333 0,317 0,319 0,288 0,326
Wielkopolskie 0,659 0,661 0,736 0,741 0,774 0,757 0,801 0,695 0,728
Zachodniopomorskie 0,490 0,483 0,479 0,513 0,505 0,478 0,455 0,438 0,480
Lubuskie 0,456 0,444 0,453 0,417 0,421 0,398 0,384 0,369 0,418
Dolnoslaskie 0,550 0,559 0,611 0,617 0,688 0,706 0,716 0,748 0,649
Opolskie 0,328 0,311 0,320 0,293 0,292 0,270 0,261 0,241 0,290
Kujawsko-Pomorskie 0,398 0,379 0,409 0,395 0,376 0,348 0,317 0,304 0,366
Warminsko-Mazurskie 0,403 0,337 0,346 0,342 0,335 0,318 0,312 0,305 0,337
Pomorskie 0,957 0,988 0,972 0,890 0,905 0,836 0,867 0,901 0,914
Slovenia
Vzhodna Slovenija 0,343 0,337 0,335 0,354 0,364 0,369 0,379 0,368 0,356
Zahodna Slovenija 1,770 1,774 1,773 1,743 1,723 1,711 1,697 1,705 1,737
Slovakia
Bratislavský kraj 2,898 3,147 3,243 3,233 3,225 3,176 2,985 2,887 3,099
Západné Slovensko 0,708 0,688 0,685 0,718 0,698 0,641 0,676 0,708 0,690
Stredné Slovensko 0,796 0,772 0,756 0,748 0,793 0,822 0,807 0,844 0,792
Východné Slovensko 0,804 0,755 0,737 0,709 0,694 0,750 0,792 0,753 0,749
Conclusions
This article deals with the analysis of territorial concentration and regional sectoral
specialization in NUTS2 region of V4+ countries between years 2005-2012. 4(6)
statistical measures were applied to define specialization and concentration in
particular regions.
52 Strategica 2016
The major findings of this analysis were that the ICT activities that form the ICT
economic sector tend to concentrate into one specific region in all the respective
countries. It is typical for these regions that they are the capitals of the country. The
level of concentration in these regions is rather unchanged. ICT strengthened slightly
in Hungary and Slovakia during the analyzed period of time, in other regions (capitals
of the country) weakened moderately. The region most specialized in ICT activities
was Praha (Czech Republic), the least specialized regions from a V4+ group of
countries, in the economic branch of ICT, were regions Tirol, Vorarlberg, Eszak-
Magyarország, Opolskie a Kujawsko-Pomorsie. Moreover, the representation of ICT
within the regions is significantly disproportionate (except Slovakia), with a gradual
tendency to become more concentrated in a few particular regions within each
country. The ability of countries to be in a certain economic activity better than others
is a source of competitive advantage and further development. Therefore it is
appropriate to increase the concentration of economic sectors in these economies.
The results of the presented analysis are (might be) the groundwork for a further
research on the importance and role of sectoral concentration and specialization
exceeding the regional economic level and development.
Acknowledgements. This paper was supported by the Ministry of
Education, Youth and Sports within the Institutional Support for
Long-term Development of a Research Organization in 2016.
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54 Strategica 2016
THE EUROPEAN NEIGHBORHOOD POLICY AS A KEY FRAMEWORK
FOR STABILITY AND ECONOMIC COOPERATION
Redouane MOUHOUB
Bucharest University of Economic Studies
6 Romana Square, Sector 1, 010374 Bucharest, Romania
mouhoubredouane@hotmail.fr
Abdelmalek DEBBIHI
Bucharest University of Economic Studies
6 Romana Square, Sector 1, 010374 Bucharest, Romania
malek2015@yahoo.fr
Abstract. The European Neighbourhood Policy (ENP) has been launched in 2003 and
implemented in 2004 by the European Union (EU) to create an area of prosperity,
stability, security and economic cooperation with neighboring countries, with the
objective of avoiding the emergence of new dividing lines between the enlarged EU and
its neighbors. This objective go hand in hand with Article 8 (1) of the Treaty on the
European Union (EU): "The Union shall develop a special relationship with neighbouring
countries, aiming to establish an area of prosperity and good neighbourliness, founded on
the values of the Union and characterized by close and peaceful relations based on
cooperation”. The assessment of this policy reveals some ambiguities concerning its
objectives, mechanisms, and its perception by member countries and neighboring
countries as well as its position in the foreign policy of the Union. Indeed, this policy has
been implemented immediately after 2004 enlargement to avoid the emergence of "new
dividing lines" with neighboring countries. It supposes the application of the same
approach applied to countries applying for membership become then a member of the
EU. However, this policy excludes membership option for neighboring countries following
the former president of the European Commission M. Romano Prodi's formula
"everything but institutions". The conditional offer proposed by EU to neighboring
countries makes this policy unilateral based on the principle “more for more”. The EU
offer is limited to a financial and technical assistance as well as an association
agreement, which presents more challenges than advantages. This approach has been
criticized by the EU itself in the consultation document entitled "towards a new
neighborhood policy". The case of Ukraine is revealing. The implications of the signature
of the Association Agreement with the EU on its territorial integrity have further
strengthened the EU accession aspirations among pro-European Ukrainian. The
complexity of the means, objectives and the design of the ENP exacerbates ambiguity of
this policy. Actually, this policy concerns several neighboring countries and managed by
bilateral agreements. The way in which this policy has developed and the current
challenges and threats faced by the EU and neighbouring countries after more than ten
years of its launch lead us to seek if this policy had the means and the necessary
implementation measures to achieve its strategic objectives and if this policy still able to
achieve this objective particularly since the policy review was launched. The case study
methodology focusing on Ukraine with comparisons made with other countries of the
neighbor is used to argue findings related to the failure of the EU to anticipate and
manage the Ukraine crisis, complexity, and ambiguity that characterizes the ENP.
Economics 55
Keywords: European Neighbourhood Policy (ENP); European Union (EU); Ukraine;
Eastern Partnership (EaP); Union for the Mediterranean (UfM).
Introduction
The European Neighbourhood Policy (ENP) has been implemented to avoid new
dividing lines between the widened Union and the countries in the vicinity. The
European Union (EU) wishes to achieve this objective by exporting its values and its
rules of the single market while excluding membership option in this space using its
soft power through its democratic, economic and social development (Joannin, 2009).
However, the current situation in the countries of neighbourhood, after more than 10
years since the launch of this policy, proves that not only it did not achieve the main
objective of stability and creation of an area of prosperity, but also did not prevent the
destabilization of the neighbourhood and the explosion of violent conflicts. Even the
use of restrictive measures, which considered as the powerful tool of the EU to
implement its foreign policy (Duhamel, 2012) did not achieve results as expected.
Paradoxically, this policy which failed by its passivity to ensure the stability of the
neighborhood and its prosperity, in particular, the Southern Mediterranean, its
implementation in the countries of the Eastern Europe provoked the outbreak of a
conflict in Ukraine.
The challenges that this policy faces go beyond its current capabilities and the means
provided for its implementation. The ENP, which actually represents the framework in
which the EU concretizes its foreign policy in the neighborhood, become only an
instrument of this policy. Confusion glides over the role of this policy in the EU foreign
policy. This policy, which has been omnipresent in the implementation of the Oriental
Partnership and the management of the Ukrainian crisis, it was almost overlooked in
the management of the migration crisis and conflicts that erupted in the Southern
Mediterranean. The management of the "Arab Spring" was a victim of the unilateral
conflict management by the Member States without recourse to the EU institutions
(Demesmay & Sold, 2010).
The implementation of this policy and its evolution confirms this confusion. The ENP
has come to substitute the policy of enlargement, for the benefit of the Eastern Europe
countries and at the same time and has brought profound changes to the rules of
cooperation with the countries of the Southern Mediterranean established by the
Barcelona Process (European Commission, 1995).
The current challenges in the neighborhood, to which faces the EU, demonstrates that
the ENP has not been prepared for these developments and that the legal and financial
means of this policy are not living up to its ambitions and goals. This is due to the lack
of an overall strategy in the field of foreign policy and security (Irving, 2012) and to the
failure of the political union (Dehousse, 2006). The launch by the European
Commission of a reflection regarding the ENP reform, after the Ukrainian crisis, is the
proof of its failure more than 10 years after its launch. However, Each EU failure on the
international scene is a factor for deepening its foreign policy facing resistance from
the Member States to preserve their national sovereignty (Biava, 2005).
56 Strategica 2016
The ENP ... a thoughtful policy or an alternative to enlargement policy
The development of the neighborhood policy raises certain questions about the policy
and the timing of its launch. At first glance, it seems that this policy intervened to
complete the circle of cooperation with eastern neighbors after having formalized the
cooperation with Southern Mediterranean countries under the Barcelona process.
However, it came just after the EU noticed the impossibility continue its enlargement
policy.
Indeed, the formalization of the EU's relations with its neighbors does not date from
2004; it goes back to 1995, with the launch of the Barcelona process. According to the
Barcelona Declaration, the objective of this partnership is to create a space for
dialogue, exchange, and cooperation to ensure peace into "a multilateral and
sustainable framework of the relations established in a spirit of partnership, by taking
into consideration the characteristics, values and peculiar features to each of the
participants". This partnership with the Mediterranean countries was based on four
pillars concerning the political and security, economic and financial, social and cultural
fields, and finally immigration.
The launch of the ENP just after the 2004 enlargement was not a coincidence of date,
but rather a response to the concerns about the EU’s accession of 10 new members. It
was also an alternative to the proposed enlargement policy for the countries of Eastern
Europe which have not acceded to the EU.
This policy has brought almost the same conditionality as was the enlargement policy,
which suggests that a future accession of the Eastern Europe countries is always
predictable, and that, despite the exclusion of the membership option in the
neighborhood policy. This is confirmed by the speech of the former President of the
European Commission, Romano Prodi (2002) "to share everything with the Union,
except its institutions", " We have to be prepared to offer more than a partnership and
less than a membership, without precluding the latter".
This speech which constitutes the basic reflection for the launch of the ENP answered
essentially to the questions asked by Mr. Prodi (2002): "What have we to offer our new
neighbors in a near future? What prospects can we hold out to them? Where does
Europe end? These are the questions we have to answer. The European public is
calling for such a debate. I know: this debate will heat up after the accession of new
members. Therefore it is our duty to start finding some answers". These responses
have taken shape in 2004 in the ENP, confirming that this policy is intended primarily
to the countries of Eastern Europe to prepare them for an eventual membership
without an express commitment taken by the EU.
Southern Mediterranean countries, whose relations were framed by a neighborhood
policy peculiar to this region even before the 2004 enlargement, were included in this
policy to provide a comprehensive and consistent dimension to the EU policy towards
its neighborhood from the east and the south. Even the Union for the Mediterranean
(UfM), which was only a proposal encompassing the Mediterranean countries, has
been appropriated by the EU. However, the new ENP has brought major changes to the
cooperation framework provided by the Barcelona Process. It dedicates the de facto
unilateral aspect of this policy, which is designed only by the EU and proposed to
Economics 57
neighboring countries, while the Barcelona process was a partnership negotiated
multilaterally with the consent of the Mediterranean countries.
The five-year work program (European Commission, 2005) adopted at the Barcelona
Summit on the occasion of the celebration of 10 years of Euro-Mediterranean
partnership within the framework of the 1995 Declaration, states that the cooperation
respect "the national priorities, and based on the commitment of the countries in the
region to reform, included in the Tunis Declaration".
However, the ENP, as a response to the Eastern Europe countries, it was part of the
process of enlargement policy, which had the engine the membership perspective.
Nevertheless, the ENP poses conditionality reforms without this prospect according to
the European Commission (2003, p.16) communication text on enlarged Europe -
Neighbourhood: A New Framework for the Relations with our East and South
neighbours, it is stated that "This implies the partners taking on considerably deeper
and broader obligations, specifically when it comes to aligning with Community
legislation". Therefore, EU proposes in the ENP to export its model and its values to
neighbouring countries. In the absence of a prospect of membership, EU aims to be
itself as an attractive target for neighbourhood countries using its soft power (Joannin,
2009) following the formula "sharing everything but institutions" including the sharing
of principles, values , and standards of EU.
Boniface (2007) considers that the ENP, which addresses in the same manner to
countries whose aim is to join the EU, as the case of some countries of Eastern Europe
or countries that are not sharing the same goal or simply are not eligible for
membership as was the case of the countries of the Southern Mediterranean, risks
displeasing the first ones and arouse the distrust of the second.
The idea to realize with the ENP the same objective as that of the enlargement policy
has created confusion among the neighboring countries and has brought major
changes in the perception of the nature of cooperation between EU and its neighbors.
The most effective instruments at the disposal of this policy are the financial
instrument and the bilateral association agreements. For Southern Mediterranean
countries, such instruments already exist, however, the framework of cooperation with
EU has become increasingly unilateral and constraining, against a significant decline in
multilateral dialogue framework provided by the Barcelona Process. However, for the
Eastern Europe countries, which hoped to join the EU, the new proposal hardly
changed their perception as for their relationship with the EU which remains
conditioned by a future accession to this space which failed to lift the ambiguity
surrounding the ENP on the subject of the accession of new countries to the EU. This
sense of belonging to the EU was the mainspring of pro-European protests in Ukraine.
The conflicts in the Mediterranean and the ENP’s passivity
The EU, in its relations with its neighbors, faced many challenges and disparities in the
level of development which separate it from neighboring countries (Lepesant, 2004).
The subsequent developments in the Southern Mediterranean region have surprised
EU and the Member States.
58 Strategica 2016
Tisseron (2011) distinguishes three stages in the EU’s response to the revolts and
revolution in the Arab world. Between late 2010 and early 2011, the EU feels
overtaken by events and regrets not having included the political reforms
conditionality of the partner countries to activate the European support. Secondly, the
EU wanted to catch and mark its presence by humanitarian aid granted to Tunisia (€
17 million) and Libya (€ 30 million) and statements condemning the Libyan, Tunisian,
Egyptian and Syrian regimes and the adoption of a series of sanctions against the
Libyan regime. Thirdly, the EU announced the reorientation of the ENP from a financial
point of view by announcing an additional € 1.2 billion to more than € 5.7 billion
available for period 2011-2013 and launched, in parallel, a new EU strategy towards
neighboring countries in the South as in the East.
Indeed, after the Arab revolts, the European Commission (2011a) launched the
"Partnership for Democracy and Shared Prosperity with the Southern Mediterranean"
hinged on democratic transformation and a strengthening of institutions, a stronger
partnership with the people as well as on a growth, sustainable and inclusive economic
development. Through this partnership, EU wishes to adopt a differentiated strategy
by conditioning the strengthening of partnerships with the neighboring countries by
achieving concrete progress in the political reforms in the areas of democracy, human
rights, good governance and rule of law.
This partnership came to strengthen the principle "more for more" and to devote the
unilateral aspect of the ENP giving to the EU the diffuser’s role of values and prosperity
by using of its soft power. Indeed, the text of this partnership clearly states that "It is an
incentive-based approach based on more differentiation (“more for more”): those
(neighboring countries) go further and faster with reforms will be able to count on
greater support from the EU. Support will be reallocated or refocused for those who
stall or retrench on agreed reform plans".
This proposed partnership offers as "reward" for countries that achieve the desired
reforms by the EU, the resumption of the negotiations on the association agreements
for an "advanced status" which enables a more meaningful dialogue between the
partner countries and EU’s institutions.
The Triangle Funding - mobility - markets, proposed within the framework of this
partnership has been specified in the EU’s Joint Communication (European
Commission, 2011b) marking the launch of "a new strategy with regard to a
Neighbourhood in transformation ".
However, the initiative undertaken by the EU after the revolts and conflicts triggered
in the Southern Mediterranean joins rather in the logic of what should be the
partnership with the neighborhood of the Southern Mediterranean and not in a vision
on what to do to stabilize the region and find peaceful solutions to conflicts. This
approach conceals a sense of regret and a desire to catch up with the rapid
developments in this area.
In efforts to conflict resolution in the region, EU diplomacy was overshadowed by the
diplomacy of member countries. The discrepancy between the Member States’ foreign
policies and the EU’s has become visible more than ever during the "Arab Spring".
Certain politics have been adopted at national level by the Member States and then
Economics 59
submitted at the EU institutions level, to snatch a consensus and a European support as
it was the case of the French proposal to intervene in Libya, adopted by the United
Nations Security Council, but which has not reached consensus at European level,
especially after the opposition of Germany (Matalan, 2011). The couple Franco-
German has shown disagreement and a lack of cooperation in conflict management in
the Southern Mediterranean area (Demesmay & Sold, 2010).
The new EU proposal for a partnership with the countries of the Southern
Mediterranean is therefore only a future vision of the basis for cooperation between
the Union and Mediterranean neighboring countries. Conditioning EU support for
political reforms in the partner country has, in fact, only a limited impact, because
these countries are more concerned about the internal situation than by the EU’s
financial assistance proposals. Moreover, the EU's new vision for the ENP has not had a
positive impact in the Eastern Europe region as the study shows the case of Ukraine.
Ukraine ... the straw that broke the camel’s back
Contrary to the passivity of the EU’s foreign policy dealing with conflicts in the
Southern Mediterranean region, this one was rather aggressive in the Eastern
European region, within the framework of the Oriental Partnership. The strengthening
of the Eastern Partnership proposed in the document "a new strategy towards a
neighborhood in transformation" was immediately implemented by the EU’s
institutions which have accelerated their diplomatic pressure to result in the signing of
agreements association with the Eastern Europe countries. This is considered as an
important stage in achieving the ENP’s objectives with the new neighbors following the
EU’s 2004 enlargement, especially to create a space of stability and prosperity.
However, this policy has paradoxically caused the opposite. The signing of the
Association Agreement with Ukraine has plunged the country into instability and
caused the deterioration of relations between EU and Russia, creating a new line of
division between this union and a great neighbor.
The scenario according to which the situation in Ukraine developed after the summit of
Vilnius was simply unpredictable for Ukrainian, European as well as for the Russian.
A chronological reading about the beginnings of the current crisis in Ukraine
highlighted a conflict of interest between the European and the Russian as well as
between the pro-European and pro-Russian Ukrainian components with direct
consequences on the stability of Ukraine.
Right after the decision taken by the Ukrainian authorities, on 21 November 2013, to
suspend the preparations for the signing of the association agreement in Vilnius
Summit (28 and 29 November 2013), pro-European protesters gathered on Maidan, in
Kiev, to claim their belonging to Europe and to urge the Ukrainian government to
change its attitude. These events were described by the EU, that noted in the joint
declaration of the Vilnius Summit on the oriental Partnership, as "the unprecedented
public support for the political association and economic integration of Ukraine into
the EU" (European Council, 2013).
60 Strategica 2016
The Russians who were surprised by the events of "Maidan" hurriedly supported their
diplomatic success to keep Ukraine in the Eurasian project by granting, on 24
December 2013, three (03) billion dollars (2,2 billion Euros) representing the first
tranche of the financial rescue plan of 15 billion dollars (11 billion Euros) under the
agreement signed on 17 December 2013 in Moscow between the Ukrainian and
Russian presidents (Le Monde, 2013).
On the European side, by using of restrictive measures tool (Duhamel, 2012), sanctions
have been taken against those responsible for violence (European Council, 2014). In
addition, European and American officials also increased pressure on the government
and the Ukrainian President and they have multiplied their travels widely publicized,
while openly providing support to pro-European protesters in Ukraine.
However, the events have accelerated until the dismissal, on February 22nd 2014 of the
Ukrainian President Yanukovych (Le Huffington Post, 2014), followed by the
annexation of the Crimea by Russia, by signing on March 21st 2015 by the Russian
President of the law planning the creation of two Russian administrative entities,
namely Crimea and Port of Sevastopol (Le Monde, 2014).
The EU, which immediately condemned the annexation of Crimea by Russia, signed on
21st March 2014, the first part of the Association Agreement with Ukraine (European
Council, 2014) followed by the final signing of the Association agreement 27th June
2014 (European Commission , 2014). On May 11, 2014, the referendum of self-
determination have been organized by the separatists and that gave victory to the
"Yes" by 89% in the "People's Republic of Donetsk" and 96% in the "People's Republic
of Luhansk " (Baczyńska, Polityuk & André, 2015) which led to the outbreak of armed
conflict in Eastern Ukraine.
It is clear that the EU policy with its neighbors of Eastern Europe was lacking visibility.
Certainly, it was more active with regard to that intended for the neighborhood of the
Southern Mediterranean and made a big step forward by signing the association
agreements with the countries of the Eastern Partnership (Ukraine, Georgia, and
Moldova), however, it obtained counterproductive and irreversible results. The same
ENP which is supposed to ensure stability and security in the neighborhood caused the
disorder, instability, and insecurity in Ukraine and a deterioration of the relations with
the Great Russian neighbor, an economic and military giant and a major supplier of
energy to Europe.
Indeed, according to the report of the House of Lords of Great Britain (2015) on the
relations between EU and Russia, a "significant error" of analysis was committed by
the EU concerning Ukraine which neglected the warning signals. The report of the
House of Lords revealed that the EU member countries have demonstrated a lack of
good information gathering and a lack of coordination in their foreign policy. They
overestimated at the same time the intentions of the Ukrainian leaders to sign the
Association Agreement, showed ignorance to the Ukrainian public and underestimated
Russia’s hostility to the Association Agreement.
The failure of the EU's approach to its neighborhood was confirmed by the launch of a
consultation on the reform of the ENP following the consultation document of the
European Commission (2015a) entitled "Towards a new neighborhood policy ". This
Economics 61
document leaves no room for doubt; ENP needs to be revised. This consultation paper
deserves to be studied because it carries within it also the questions addressed to
different actors, requested to share their vision of the new neighborhood policy, a
report on the recorded shortcomings and limitations of different cooperative
frameworks of the ENP.
Conclusion
The main objective of the ENP, to create an area of stability and prosperity, since its
launch in 2004, was a failure by its passivity, as in the case of the Southern region of
the Mediterranean, or by its dynamism, in the case of Eastern Europe. This policy was
not able to prevent armed conflicts in the Southern Mediterranean countries and,
ironically, caused the outbreak of an armed conflict in Ukraine, and the deterioration of
the relations with the Russian neighbor.
Indeed, the Ukrainian crisis has revealed the limits of the ENP and was the triggering
event of its revision. The document "Towards a new neighborhood policy" criticizes
almost all unilateral aspects based on a European offer which did not completely
involve the partner countries. The aspirations of the partner countries are often not
taken into account under the framework proposed by the ENP. This it can be explained
by its anarchic development to seek an alternative to enlargement policy, to be
proposed to the new Eastern Europe neighbors. It included the countries of the
Mediterranean framed earlier by the Barcelona Process, which worked rather well,
with the objective to have a single policy for the entire neighborhood.
Since its launch, ENP had a lack of clarity, visibility, resources as well as a long-term
strategy. It brought new conditions to the cooperation with the Mediterranean
countries in order to prepare, within its overall neighborhood policy, the countries of
Eastern Europe for an eventual membership. In addition, this policy remains
ambiguous, what fuelled most of the aspirations of the Eastern Europe countries to
adhere to EU, and provoked some confusion in the Mediterranean neighborhood.
The ENP has shown that it is an instrument of the EU’s foreign policy rather than a
framework for cooperation. Conceived to develop privileged relations with the
countries of the neighborhood and to establish an area of prosperity, the ENP has
turned to an instrument of response to emergency situations or an instrument of
influence.
The ENP’s revision project proposed by the European Commission (2015b) gives as
the main role of the ENP, the stabilization of the neighborhood. This new policy aims to
be more cooperative, basing itself on the principle of differentiation and ownership of
this policy by member countries and partners. It comes also to ensure economic
stabilization of the partner country and a place for the neighborhood of the
neighborhood, but that necessarily involves strengthening the EU's foreign policy.
62 Strategica 2016
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Economics 65
THE BENEFITS AND THE DRAWBACKS OF THE EU – ALGERIA
ASSOCIATION AGREEMENT
Abdelmalek DEBBIHI
Bucharest University of Economic Studies
11 Tache Ionescu St., Bucharest, Romania
Malek2105@yahoo.fr
Redouane MOUHOUB
Bucharest University of Economic Studies
11 Tache Ionescu St., Bucharest, Romania
Malek2105@yahoo.fr
mouhoubredouane@hotmail.fr
Abstract. On September 1, 2005, the Agreement of Association between Algeria and the
European Union came into force. This agreement is part of the Euro-Mediterranean
Partnership, also known as Barcelona Process, launched by the EU in November 1995 and
aimed, in the economic aspect, the creation of a free trade area in the Mediterranean. The
implementation of this agreement, signed in Valencia (Spain) in April 2002, is the first
step for Algeria towards a wide and varied program of restructurings to integrate the
European market. Except that, the achievement of this objective has a significant
financial cost, which will weigh on the general macroeconomic balances, following the
lifting of tariffs, on one side, and the weakness of the services responsible for tax
collection, on the other hand. Algeria may, against part of its commitment to this
program, by eligible for the aid offered by the European part under the provisions of this
agreement and other windfalls arising from the restructuring of financial institutions
responsible for tax collection. Indeed, the MEDA program, the acronym of "adjustment
measures", which is a financial instrument for the implementation of the Euro-
Mediterranean partnership, and through which the EU is supposed to provide financial
and technical assistance to the Mediterranean partners, including Algeria, to allow them
to achieve the objectives of the Barcelona declaration in these three areas: political,
economic and social. Thus, the new program (MEDA) replaces the bilateral financial
protocols that previously existed with the countries of the Mediterranean Basin and
encourages the EU partners for the establishment of an economic environment, favorable
to the requirements of the transition in these countries. Certainly, the EU remains the
main partner in trade of Algeria. Thus, the situation is rather mixed since the
implementation of the Association Agreement has no impact on the level and
diversification of Algerian non-hydrocarbon exports to the EU countries, because Algeria
wanted, through the implementation of the Association agreement, to achieve a
diversification of the Algerian economy to allow the development of non-oil exports. The
results being below the expectations of Algeria, informal consultations for the revision of
tariff dismantling took place between the both parts. The purpose of these consultations
is to postpone the deadline for the implementation of the free trade area in 2020 instead
of 2017 and to provide the recovery of customs duties, according to the provisions
planned by the agreement of association for a list of sensitive products.
Keywords: Algeria; EU; Association Agreement; Free Trade Zone; MEDA.
66 Strategica 2016
Introduction
During the nineties, Algeria has adopted a strategy of economic restructuring which
aimed to establish an open market economy to the outside world. For this purpose, for
trade liberalization and with the prospect of a consolidation of its place in the world
economic scene, Algeria has joined to Euro-Mediterranean process of association
which resulted in the signing of an agreement with the European Union on 22 April
2002 and which won the approval of the Algerian parliament in March 2005, which
finally entered into force on 1 September 2005.
This agreement stipulated the gradual cancellation of customs duties for a transitional
period of twelve years and which would allow, by the year 2017, the emergence of a
free trade zone between Algeria and the European Union. On the other hand of this
lifting of tariffs, the European Union should provide financial and technical support for
the upgrade of the Algerian economy, so that it becomes competitive, and to limit the
losses due to the implementation of these measures of liberalization of the Algerian
market.
For Europe this agreement comes after a series of projects, it makes sense constituted
an instrument for the realization of the great Mediterranean project launched by "the
Barcelona Declaration in 1995" which aims to stabilize the Mediterranean region by
the spread of democracy which can’t be done without economic openness.
Only by coming to the brink of bankruptcy in the mid-90s that the country resolves
some initiatives such as opening the national capital, the attraction of foreign capital,
WTO membership or signing of Association agreements with the EU. From all of these
goals, only the one with the EU association agreements could be completed in 2002; As
for the other, we could speak of failure, so far when Algeria is not yet a WTO member,
the domestic private investment remains far short of what is expected, the country
attracts little FDI and this focus particularly in the oil sector. And this is how the simple
result of the Agreement is the tree that hides the forest; its benefits are oversized and
minimized its drawbacks. The agreement would be a new path that opens before the
country and provides solutions to its many problems.
“Before reviewing the advantages and the inconveniences of this Algerian-European
agreement and the challenge of the Algerian economy to maximize profits and suffer
the fewest constraints on the occasion of the application of the measures of this
agreement, it is advisable to review the process of conclusion of the agreement of
association concluded between Algeria and the EU, and the conditions surrounding the
negotiations between the two parties” (Strategica, 2005, p.6).
After over ten years of the entry into force of the Association Agreement between
Algeria and the EU, could we estimate its contribution to the objectives? How much is
it better cooperation, reconciliation, and understanding between Algeria and the
European Union? Is it in the hopes of living in better conditions? Will he be able to
achieve good ambitions of the northern countries and reduce the prosperity gap
between the two parts of the world?
Economics 67
Algerian - European cooperation
El Arabi (1990) said that during the emergence of the European Community, Algeria
has benefited from a series of customs advantages comparable to those granted by the
Rome Convention, in consideration of its status of the full member, being colonized by
France. After the independence of Algeria in July 1962, the European Community has
maintained these benefits granted prior to Algeria.
Mahjoub (1994) shows that Algeria, in the sixties, has not signed an association
agreement with the European Community as was the case with Morocco and Tunisia.
In April 1976, Algeria signed a cooperation agreement as part of the overall Euro-
Mediterranean policy that was not limited by time and included the commercial,
financial and social as well as technical cooperation. The objective of this agreement
was the upgrade of Algerian products to enter the European market and the
development of trade within the European Community and the promotion of trade
between the two parties.
Alaoui (1994) demonstrated that this agreement also allowed Algeria to gain benefits
similar to those granted to certain Mediterranean countries including those of the Arab
Maghreb. The trade cooperation between Algeria and the European Community has
not had the expected results view that trade has focused on industrialized products
represented only 2% of Algerian exports as we shown in the table below.
Table 1. The Algerian exports (1976-1987) in % (Algerian Office of Statistics, 1999, p.101)
Exports 1976 1980 1984 1988
Food 2.7 0.8 0.4 0.4
Industrial products 2.1 0.9 1.9 3.2
Hydrocarbons 95 98.2 97.7 94.5
Machinery and production equipment / 0.01 0.01 1.3
Transport equipment and spare parts 0.05 / / 0.3
Consumer products 0.1 0.04 0.02 0.2
Totals 100 100 100 100
Regarding the financial support granted to Algeria from 1976 to 1996, their amount
reached 850 million ECU (European Currency Unit), whose value is calculated based
on a basket of currencies of the Member States of the European Economic Community
(EEC) whose composition reflects the share of each country in the production and
intra-community trade) and only 40% of this amount has been paid during this period.
The process of Euro-Mediterranean cooperation
The concept of Euro-Mediterranean cooperation was a new plea which aimed the
development of the whole region and which was approached for the first time during
the Barcelona Declaration in November 1995 and in conventions of integration which
connected the European Union with each country of the Mediterranean. For that
purpose, this new form of cooperation came to correct inadequacies noticed in
cooperation policies adopted during the seventies and eighties. Several factors have
helped in the development of this new approach from which we can quote in
particular:
68 Strategica 2016
International factors: El Majdoub (2000) said that the world knew, at that time, a vision
which tended towards the creation of large regional and international economic and
trading blocs to explore new markets at the end of the Cold War and the emergence of
new world order after the fall of the Communist bloc.
European factors: European Commission (1997) affirmed that the European Economic
Community met, in the late eighties, major challenges which consisted in adapting
themselves to the new situations of these economic relations with the rest of the world
and which required the modernization of the European Union through the extension to
other countries of the European continent. This new vision has been clearly adopted at
the convention of Maastricht in 1991.
Factors related to the southern countries: the Southern Mediterranean countries have
undergone, during the nineties, a large depreciation in the rate of development and
there was a big difference between incomes in these countries, compared to those
European countries where an imbalance in trade and investment flows. This has led
some plagues in the Mediterranean region such as illegal immigration and the
emergence of conflicts of interest in the southern Mediterranean countries, which
prompted the European Union to find solutions to restore stability in the region
through association agreements which ultimately will bring balance to the countries of
the south and north of the Mediterranean. For that purpose and according to the
Barcelona Declaration (1995), the Euro-Mediterranean cooperation process was
devoted to three areas:
The political and security field: the Euro-Mediterranean countries are expected to
respect the principles of democracy and human rights, as well as the fundamental
rights quoted in the United Nations Charter and to fight against terrorism in all its
forms.
The economic and financial field: which aims eventually to create a flourishing and
prosperity region by improving the living conditions of the people and reduce the
disparities in economic development by progressively establishing a free trade area.
The social, cultural and human field: it is aimed at developing human resources and
promoting dialogue between cultures as well as a close collaboration between the
components of civil society.
Algeria and Euro-Mediterranean cooperation
Algeria has agreed since 1993 to establish a Euro-Mediterranean cooperation even
before the ratification of the Barcelona Declaration in November 1995. On September
1, 2005, the Association Agreement between Algeria and the European Union entered
into force putting out the provisions of the Barcelona process which consisted in
promoting partnerships, trade, solidarity and development in the Euro-Mediterranean
zone. This association agreement represented for Algeria an opportunity for the
economic, financial and technical cooperation and the development of the relations
with its European partners as shown below in the illustrative tables of external trade
of Algeria.
Economics 69
For the European Union, the agreement represented a part of the overall strategy to
strengthen the relations of the European Union with its neighbors in the Southern
Mediterranean in order to create a free trade area.
Table 2. The Algerian exports by region (1992-1998) in % (NSO - Algiers, November 1999,
p.11)
Economic zones 1992 1993 1994 1995 1996 1997 1998
European Union 72.8 68.9 69.7 64.9 60.0 63.5 63.9
North America 14.2 17.5 17.9 19.0 19.0 19.4 19.10
Other European 5.0 3.6 4.5 8.0 11.4 7.0 7.15
Countries
Asia 2.1 1.7 2.8 2.3 1.9 1.5 0.93
Arab Maghreb 2.3 2.9 2.2 2.7 2.0 2.1 1.25
Union
Latin America 3.5 5.1 2.6 2.8 5.5 6.3 7.38
Arab countries 00 0.2 0.1 0.2 0.1 0.1 0.23
Africa 0.1 0.1 0.2 0.2 0.1 0.1 0.05
Rest of the world 00 00 00 00 00 00 00
Total 100 100 100 100 100 100 100
Table 3. Algerian imports by region (1992-1998) in % (NSO - Algiers, November 1999, p.8)
Economic zones 1992 1993 1994 1995 1996 1997 1998
European Union 63.3 58.3 55.9 59.3 62.5 56.7 57.4
North America 13.1 17.7 18.3 17.3 14.1 16.2 16.1
Other European 7.7 6.7 9.5 6.7 6.9 9.4 9.9
countries
Asia 8.6 10.2 8.6 8.7 8.1 9.2 8.9
Arab Maghreb 2.6 2.4 2.7 1.8 1.4 0.3 0.3
Union
Latin America 2.1 1.8 2.3 3.4 3.9 2.2 2.0
Arab countries 1.2 0.9 1.3 1.2 1.4 3.9 2.8
Africa 0.3 0.5 0.5 0.4 0.8 0.7 0.8
Rest of the world 1.1 1.5 0.9 1.0 0.8 0.7 0.8
Total 100 100 100 100 100 100 100
The effects of the Algeria-EU Association Agreement
The coming into force of the Association Agreement between Algeria and the European
Union should allow freer trade and greater cooperation between the two parties which
would lead to a gradual entry of the Algerian economy within the global economy. This
agreement also stipulates the adoption of a restructuring and upgrading program of
Algerian companies to face competition from European companies and that, in order to
minimize to the maximum the negative effects of the lifting of tariffs. At that time, the
Association Agreement was closely followed by Algerians who were awaiting the
results of the abolition of tariffs. They expected that European products were going to
invade the country to the detriment of local products and the Algerian companies for
which foresaw an uncertain future.
Regarding industrial products, the Association Agreement plans the dismantling of the
customs duties and related to it, in three stages to arrive in 2017 at a total lifting of
70 Strategica 2016
such rights. The first step is to eliminate 2076 unnecessary tariff lines on a product list
subject to customs taxes between 5 and 15%. These products are raw materials, raw
products and materials not produced locally which are intended for industrial
production in the field of chemical industry, textile industry, metallurgy and building
materials.
The second step consists in removing 1,100 tariff lines over a period of 5 years from
the third year of the coming into force of the Association Agreement. The concerned
products are the property of industrial and agricultural equipment including
pharmaceuticals, mechanical equipment, electronic and electrical equipment, rail
transportation equipment, automobile and spare parts and devices and measuring
control instruments.
The third stage which spreads out over 10 years, from the third year of the coming into
force of the Association Agreement, will see the total elimination of tariffs in 2017, in
the case of the finished products, or 1964 tariff lines. This schedule is not final because
it may, at any time, be subject to a review in the case of difficulties encountered by
Algeria, and exceptional measures of limited duration can be applied to infant
industries, or to some sectors in the course of restructuring.
Regarding agricultural products, the Association Agreement provides an extension of
the concessions to new agricultural products and processed products, as well as
fisheries products and in a period of five years, and after that period, Algeria and the
EU will agree on another liberalization step. Products listed below receive one of the
following concessions:
- A customs duty -free access.
- Access with partial reduction of customs duties.
- A free access to tariffs with reference to tariff quotas.
- Access with customs duty exemption but with a specific right for processed
agricultural products.
Some seasonal agricultural products are submitted to timetables and exemptions
concern only the party of ad valorem customs duties and not the specific rights.
Moreover, Article 17 of the third chapter (paragraph 4) provides that Algeria
eliminates, at the latest on January 1, 2006, the temporary additional right applied to a
list of 108 products listed in Annex 4 of agreement’s association.
The positive effects of the Association Agreement
It is difficult to make a statement of the positive consequences of the Algeria-EU
Association Agreement since we cannot measure that in the long term. Also, they are
related to the contributions of foreign investments in the Algerian economy and
efficiency of the Algerian economic policy, but they include some of the benefits:
- The fulfillment of economic reforms agreed between Algeria and the European Union
in the field of upgrading Algerian companies that will benefit from technical and
financial assistance offered by the European partner.
- The competitiveness of Algerian products with regard to the European product,
which will push the Algerian investors to improve the quality of their products in order
to market it in the European space.
Economics 71
- The general equilibrium models of the Euro-Mediterranean countries show that the
direct negative effects of the creation of a free trade area remain minimal and the
positive effects remain very encouraging in the case of multilateral liberalization on
both sides.
- The end of the marginalization of the Algerian economy, because since its
membership in the Euro-Mediterranean space establishes an opportunity for the
emergence of its economy into the world economy.
The negative effects of the Association Agreement
There were spontaneous and direct negative effects resulting from the Algeria-EU
Association Agreement, such as:
- The removal of tariffs will cause a great pressure on the macroeconomic balances
that will be directly affected as a result of falling customs revenues, which constitutes a
large part of the fiscal resources of Algeria. The fiscal resources represent 2.2 % of
gross domestic product (GDP) and 19.2 % of total tax revenue except for hydrocarbons
as shown in the following table.
Table 4. The fiscal resources of the countries of the southern Mediterranean from trade with
the European Union (on average between 1994 and 1996) (Leveau, 2000, p.89)
The EU share in Taxes on imports from the
Taxes on imports
total resources EU
Country of total tax
f GDP in of total tax f GDP in
revenue in% in %
% revenue in% %
Algeria 30.0 3.5 64.1 19.2 2.2
Egypt 19.7 3.4 39.8 7.9 1.3
Israel 1.3 0.4 52.4 0.7 0.2
Jordan 34.6 5.8 35.0 12.1 2.0
Lebanon 59.3 6.8 48.6 28.8 3.3
Libya - - 67.3 - -
Morocco 17.6 4.3 58.8 10.3 2.5
Syria 21.8 2.4 33.1 7.2 0.8
Tunisia 22.2 4.5 71.5 15.9 3.2
- A reduction of revenues arising from the taxable trade of the non-European partners
towards the European partners not submitted to tariffs.
- A reduction of revenues due to substitution by the Algerian consumer's local product
with a product imported from the European Union at low prices, which will cause a
decrease in activity of the Algerian companies and consequently a reduction of the tax
revenues of Algeria.
- The financial support provided by the European Union is not at the same level of the
sacrifices made by Algeria to benefit from upgrades of companies within the
framework of technology transfer, and moreover, the assistants are often dependent
on political and strategic criteria, then economic, as shown in the table below.
Table 5. The distribution of financial support within the MEDA program (Euro/person)
(Leveau, 2000, p.54)
Meda (1996-1999) in Populations in 1998,
Country Euro/person
% in millions
Algeria 6% 30.0 5.0
72 Strategica 2016
Egypt 24% 61.4 11.0
Palestinian 3% 2.3 36.0
authority
Jordan 9% 4.6 54.0
Lebanon 6% 4.2 43.0
Turkey 13% 63.5 6.0
Morocco 22% 27.8 23.0
Syria 3% 15.3 6.0
Tunisia 14% 9.4 43.0
Conclusion
In a comprehensive and inclusive global economy which tends to grow exponentially,
the Association Agreement between Algeria and the European Union, within the
framework of the Barcelona process, is not an end in itself, but it is a way for the
liberalization of the Algerian market and for its integration into the global economy.
This integration clearly has positive and negative effects and the Algerian government
and all Algerian economic operators need to meet this challenge and ensure that the
benefits are greater than the negative effects due to the application of the provisions of
this agreement.
The success of this association agreement is not only dependent on the European
Union's efforts but it also arouses a lot of effort on behalf of the Algerian economic
actors to achieve a series of deep restructurings in the traditional economy and this
goal can only be achieved, if certain changes are adopted as:
- The adoption of reorganization measures of economic, social and institutional
policies in order to attract more direct foreign investment in the Algerian economy and
the increase of national development rate.
- Reducing the negative effects of the measures contained in the Association
Agreement due to the lifting of tariffs on goods and services from the European Union
with new measures meant to cover its fiscal losses.
It is necessary to intend to separate from uncompetitive companies with European
companies and even reduce the activity of other companies, while waiting for their
upgrade, but without sacrificing the entire local economy in order to avoid that Algeria
becomes a market for European products. Streamlining and optimizing the use of
European financial support to mitigate the effects concerning the coming into force of
the Association Agreement despite their low amounts.
In turn, the European Union should invest further by increasing the financial support
and accelerating the transfer of know-how and the transfer of technology required for
the upgrade of Algerian companies. And finally, the Algerian companies necessity for
support, by the Algerian government through the consolidation of basic infrastructure
(roads, highways, dams, transportation, port, training, etc.) and in other financial and
technical areas necessary for the development of enterprises, to make them more
competitive with their European peers.
In 2012, Algeria presented the legal and economic arguments to convince its European
partners on the credibility of a request focused on the identification of 1058 products
considered sensitive from the economic point of view, before starting consultations
Economics 73
with the European side, under the legal provisions of the Association Agreement.
Pursuant to these discussions, Algeria has obtained the adjournment of the free trade
area with a sliding from 2017 till 2020, and as a consequence, a gain in terms of tariff
protection with regard to products considered sensitive.
The economic operators, in particular, those activating in the agricultural and
industrial sectors, will have more time to prepare for the complete lifting of tariffs
through upgrade programs drawn up simultaneously by Algeria and the European
Union.
From another point of view and following the dramatic fall of oil prices, Algeria
decided, in early 2016, to suspend its agreements with the European Union, to
strengthen its tax revenue shaken by a significant decline in hydrocarbons revenue.
Indeed, the Algerian government has suspended free trade agreements with the
European Union (EU) and the Arab Zone (Zale). It is a statement of the Prime Minister
of Algeria, Abdelmalek Sellal, which on February 14, 2016, ended the exemption of
imported goods from the European Union, the customs duties, and that may be the
beginning of a new episode of negotiations between Algeria and the European Union.
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74 Strategica 2016
ANALYTICAL CONSIDERATION OF NON-TARIFF BARRIERS RELATED
TO GEORGIAN EXPORT TO THE EU MARKET
Marine TAVARTKILADZE
Ivane Javakhishvili Tbilisi State University
3 University St., Tbilisi, Georgia
marikotava@yahoo.com
Abstract. The purpose of the study is the identification of nontariff barriers inhibiting the
export of Georgian companies’ against the background of trade liberalization. The
opportunities and expected outcomes related to the application of the agreement on Deep
and Comprehensive Free Trade Area (DCFTA) are assessed in the work. Taking into
account the specificity of the researched issue, the method of in-depth (semi-structured)
interview was selected. Fieldwork was carried out in February-March 2016 and, in all, 15
interviews, planned in different business sectors, were conducted. In the first part of the
work, the process of exporting Georgian production is assessed. The respondents that
took part in the qualitative study knew the exporting process and the related procedures
quite well because they had been exporting their production to various countries for
many years. According to the majority’s assessment, Georgian products are exported
without any impediments and, therefore, for them it turned out to be rather difficult to
speak about the problems related to the process. However, individual issues being
sensitive for Georgian business were revealed within the framework of the study. It is
noteworthy that the difficulties the respondents spoke about are largely related to other
global issues. The effect of free trade with the EU on Georgian export is assessed in the
second part of the work. During the research, the absolute majority of respondents had a
generally positive attitude to the signing of the free trade agreement, though it turned
out rather difficult for them to substantiate their attitude and provide concrete examples
as for a positive effect the agreement had on the Georgian business. At the same time, the
majority of the respondents stressed that they slightly experienced this effect on their
business: business was exempt from the export tax, though all respondents unanimously
said that they had not paid it before either; confidence for Georgian produce has risen;
quality control was tightened; unified standards were elaborated; Based on the study,
problems were revealed and recommendations were elaborated, the most significant of
which are: elaboration of export promotion measures; organization of economic agents
training courses; elaboration of concrete measures aimed at approximation to the
developed countries’ standards on the basis of formation of target-oriented
organizations. At the same time, recommendations are given as to how it is possible to
apply the free trade regime effectively.
Keywords: DCFTA; small-size country in global trade; non-tariff barriers.
Economics 75
Introduction
Most of the countries participating in international economic relations, especially
highly developed ones, have various trade regimes with their partner countries. The
character of these trade regimes can be determined by economic and political interests
of the countries, their participation in regional and international economic unions and
organizations, aid programs for economically weak countries, etc.
Studying possibilities for application of preferential trade regimes and its expected
outcomes, which directly concerns countries with small open economies, as well as the
problems related to their integration into regional unions, is assessed by the example
of Georgia-EU relations. In trade liberalization conditions it is relevant to identify
nontariff barriers which are hindering Georgian companies in exporting their produce,
in order to use the opportunities provided by free trade to a greater extent. It is
important to analyze to what extent a concrete nontariff measure promotes or
impedes the international trade turnover. Study of the mentioned issue in the wake of
signing the Association Agreement between Georgia and the European Union in
September 2014 and commencement of its regulations should contribute to the
assessment of risks and opportunities in commercial diplomacy. It is studied in the
work whether or not the measures aimed at trade liberalization contribute to the
growth of neo-protectionism within the framework of the WTO. Well-reasoned are the
possibilities of expansion of boundaries of the trade regimes application as an
important way (within the transitional period) that will promote integration of
Georgia into the EU’s economic space; The mentioned information will be useful for
researchers taking interest in this sphere from the viewpoint of familiarization with
the foreign trade development tools, as well as perfection and increasing the efficiency
of internal trade’s customs-tariff regulation tools.
Research methodology
The paper has been prepared by applying deduction, induction, analysis and synthesis,
abstraction and statistical methods of research. Georgia’s export-import database
released by National Statistics Office of Georgia has used for ascertainment consistent
patterns between analytical and statistical assessments.
Taking into account the specificity of the researched issue- identification of non-tariff
barriers inhibiting the export of Georgian companies’ against the background of trade
liberalization, the method of in-depth (semi-structured) interview was selected.
Fieldwork was carried out in the first quarter of 2016 and, in all, 15 interviews,
planned in different business sectors, were conducted. Conclusions are made based on
research results and relevant recommendations are provided.
76 Strategica 2016
Assessment of the process of Georgian export
The European Union is Georgia’s important trade partner; it accounts for 26.1% of the
country’s foreign trade, and then comes Turkey (17.2%) and Azerbaijan (10.3%). Over
the past decade, Georgia’s export has been increasing against the background of
preferential trade regimes with the EU (Table1).
Table 1. Georgia’s export by countries (Thousand USDs) (National statistics office of
Georgia, http://www.geostat.ge/)
Countries 2007 2008 2009 2010 2011 2012 2013 2014
Export
1,232,110.5 1,495,345.2 1,133,622.4 1,677,472.1 2,186,714.8 2,376,154.6 2,909,515.6 2,860,670.6
(total)
EU 268,533.5 335,165.2 237,715.6 309,550.1 424,347.6 352,908.8 607,113.3 624,085.6
CIS 461,895.5 540,884.8 416,162.3 676,672.7 1,052,505.3 1,244,427.8 1,620,731.0 1,465,184.9
Other
501,681.4 619,295.2 479,744.5 691,249.3 709,861.9 778,818.0 681,671.3 771,400.1
countries
In January-March 2016 Georgia’s trade turnover with the EU countries made up 712
million USD, which is 11% more compared to the previous year’s indicator. The main
export products are mineral products, machinery and technical devices, chemical
products, and transport equipment. Georgia exports to the EU mineral products,
agricultural products (mainly hazelnuts), finished metals and chemical products.
As it turns out, the sole leader among agricultural products that are exported to the EU
countries is fresh and dried hazelnuts. Georgian's hazelnut is traditionally one of the
main agricultural plants that had a great economic importance for many years.
According to USAID’s data as of 2013, it accounts for 24% of Georgia’s agricultural
export. Georgia is the fifth largest hazelnut producer in the world; besides, the country
is the fifth largest exporter of in-shell hazelnuts and the fourth largest exporter of
shell-free hazelnuts in the world. According to FAO FAOSTAT’s data, the amount of in-
shell hazelnuts doubled since 2000, the same situation is with shell-free hazelnuts,
which is the evidence of transition to a higher processing level compared to the first
years of study. Other products, such as processed peeled hazelnuts, roasted and finely
chopped hazelnuts, are produced in comparatively small amounts.
The table #2 that is given below shows the structure of shell-free hazelnuts exported
from Georgia in 2014 according to the exporting countries’ rating.
Table 2. Structure of Georgian hazelnuts (without shell) export, 2014
(National statistics office of Georgia, http://www.geostat.ge/)
Share in hazelnuts &
Rating Countries Export (thousand USDs)
Walnut export %
1 Italy 35752.5 19.9
2 Germany 34017.0 19.0
3 Kazakhstan 14223.1 7.9
4 Spain 12931.2 7.2
5 Czech Republic 9749.7 5.4
6 Slovakia 9729.1 5.4
7 Belgium 9065.3 5.1
8 Ukraine 4675.5 2.6
Economics 77
9 UK 4452.6 2.5
10 Lithuania 4342.1 2.4
Other countries 40336.4 22.5
Based on the performed analysis we can conclude that there is a possibility for the
growth of Georgian hazelnut export, which is associated with:
- Multiyear tradition of hazelnut production;
- Competitive price of the product;
- The country’s location in the Black Sea region that is favorable for hazelnut
production.
In conditions of fierce competition on the part of Turkey, Georgia cannot influence the
world price of hazelnuts; there are barriers in entering the global market and, with the
purpose of promotion and development of Georgian hazelnut export, support is
required on the following issues:
- meeting the phytosanitary, hygienic and quality requirements that are necessary for
export;
- encouraging cooperation of farmers in the issues related to product purchase,
processing, marketing, and wholesale trade;
- increasing of economic benefits and product quality by means of training;
- maximal utilization of preferences within Generalized System of Preferences – GSP +
and DCFTA.
A part of the export to the EU was within GSP+ regime, whose share in the total EU
export made up 40% on average. (Table 3)
Table 3. Georgian Export to EU (million USDs, 2006-2014) (Ministry of Economy and
Sustainable Development of Georgia, http://www.economy.ge/)
Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014
GSP+ Export to
EU 95.4 127.3 117.9 112.3 123.1 213.9 133.3 231.7 131.1
Total Export to
225.0 268.0 335.0 237.0 309.0 424.0 352.0 607.0 624.0
EU
GSP+ share in
total EU export 42% 48% 35% 47% 40% 50% 38% 38% 21%
The balance of trade in agricultural and related products, as well as cargo turnover
between the European Union and Georgia, is negative by many percents. Up to the
present time, the EU has been strictly protecting its agricultural and food production
sectors, introducing tariffs and nontariff barriers to trade. Because of DCFTA’s coming
into effect, a number of tariffs were canceled, though their reduction according to
product categories will be made at different rates.
In the last two years, in the process of international trade liberalization, the general
level of customs taxes sharply dropped and the share of duty-free items in the national
tariffs increased; a new universal foreign trade commodity nomenclature and the
practice of making regional agreements became widespread, offering their participants
a preferential customs tariff regime; in the trade regulation sphere reformation of
basic multilateral organizations was carried out, which was accompanied by
delegation of more functions to them and caused an increase in the number of their
78 Strategica 2016
member-states. Nontariff trade regulation measures are more widely and effectively
applied. Technical Barriers to Trade (TBT) are the most widespread and difficult
instrument in the system of international economic relations. By means of them
improper, harmful for consumers’ health and environment, products are restricted on
the market. In many cases, such measures are applied for restriction of import from
third countries and mainly appear as technical regulations or procedures related to the
assessment of compliance with technical regulations and standards.
TBT instruments:
- Technical regulations – include product specification or method of its manufacturing.
The observance is mandatory. They also include terminology, symbols, as well as
packing, labeling, and marking requirements.
- Standards – they are set by a recognized responsible body. Their application is
voluntary. They may also contain terminology, symbols, as well as packing, labeling,
and marking requirements.
- Compliance assessment – is applied to determine whether respective technical
regulations and standards are observed in product manufacturing. Includes sampling
procedure, testing, inspection, and verification.
- TBT agreement, like other WTO agreements, is based on preferential and national
promotion regimes: imported goods must come within the technical regulations that
are applied to locally produced goods.
- In trade liberalization conditions it is relevant to identify nontariff barriers hindering
companies in exporting their produce. The aim of the study is examination of the
existing export nontariff barriers that Georgia has with its important trade partner –
the EU; it was planned in various business sectors:
- Water producing company;
- Hazelnut processing company;
- Fir-tree seeds producing company;
- Juice producing company;
- Honey producing company;
- Wine producing company;
Selection of companies was made according to the following criteria: A company
manufactured products locally and exported them; Export destination was the EU
countries. Based on the study’s aim, the following tasks were determined: Assessment
of Georgian products export process; Assessment of signing of the free trade
agreement;
The respondents that took part in the study knew the exporting process and the
related procedures quite well because they had been exporting their produce to
various countries for many years. According to the majority’s assessment, Georgian
produce is exported without any impediments and, therefore, for them it turned out to
be rather difficult to speak about the problems related to the process. However,
individual issues being sensitive for Georgian business were revealed within the
framework of the study. It is noteworthy that the difficulties the respondents spoke
about are largely related to other global issues, in particular.
With the purpose of establishing business relations with nonlocal companies and,
accordingly, exporting produce, it is important for Georgian companies to be able to
Economics 79
manufacture products matching the demand (in this case it is referred to hazelnut
production in large quantities) and provide for a continuous supply. In order to meet
these two conditions, companies need large sums of money for purchasing sufficient
amount of produce on the local market and have an adequate enterprise. According to
the respondents, Georgian organizations do not have a sufficient capital and,
accordingly, they have to turn to the banks. As they say, here they encounter another
problem, since, unlike European banks, Georgian banks only provide loans at a high
interest rate and require collateral, which is a serious barrier to the development of
Georgian business. The respondents stressed it is important that the state should work
on this issue and reduce the interest rate since a mere signing of the free trade
agreement is not enough; it is necessary to promote Georgian business so that it could
tap the opened market.
Exporting a large volume cargo is related to additional expenses. The mentioned
problem is faced by the companies that export their produce by sea transport.
Georgian ports are a difficulty since they have a low sea level and large ships cannot
enter them. A representative of one of the companies stressed in the interview that, for
the mentioned reason, first they have to transport their cargo to Turkey by small ships
and then transfer it to a big ship. Due to a double transfer, the expenses related to
cargo transportation increase, which automatically raises the product’s export price.
Violation of export product exclusivity agreement between companies can take place
because of a third person/organization. Proceeding from the Georgian legislative
system, any person can buy in Georgia identical product, get the respective quality
certificate and export it, while in the same country the producer has an exclusive
delivery contract with the company. As it was stressed by one of the respondents, he
had such cases in his practice and they do not have a positive effect on a business
partnership.
Price formation is not regulated at the state level. According to a representative of one
of hazelnut processing factories, hazelnut purchasing is mainly made in Georgia
through resellers (oftentimes several links are involved) who artificially increase
hazelnut price. There is less demand for the product that rose in price, in view of which
the partners reduced their orders.
There are double standards with respect to certificate obtaining. According to the
Georgian legislation, if there is no local properly accredited laboratory, a company
employs services of a non-local company and undergoes this process only once a year.
However, if there is the necessary laboratory in Georgia, a company is obliged to obtain
the certificate for each batch, which is related to quite considerable expenses. As a
result, the cost price of the product rises.
Low recognisability of Georgian products. A mandatory condition for export is that a
company should have the respective certificates, which are variable according to a
product’s specificity. Within the framework of the study, the respondents shared their
experience with respect to the mentioned issue. As it became clear from a conversation
with them, some organizations check quality by means of their own laboratories.
However, that is not always enough for European partners. They often ask for a
conclusion of an accredited independent laboratory. In this case, a certificate is
obtained:
80 Strategica 2016
- In laboratories existing in Georgia – however, it is not possible to check quality of all
products locally (for example, honey);
- In laboratories existing abroad – in this case, either a product to be checked is sent
there or a laboratory’s representative is brought. In both cases, it is additional
expenditure for a Georgian company.
A phytosanitary certificate is a mandatory document without which exporting of a
product is impossible. The participants unambiguously stress that they never had
problems related to its obtaining. This process does not require either much time or
financial resources.
A quality management certificate (ISO) is one of the important documents that help to
establish a partnership with various companies. It is noteworthy that having an ISO
certificate is not a mandatory requirement, at the same time its existence
unequivocally raises the extent of trust to an organization. According to the
respondents, certification can be made with the assistance of both local and
international companies. However, in both cases, it is related to expenditures.
A part of the respondents says that certification process is not related to many
problems. The main point is that a company should be able to meet the requirements
and standards and pay the service cost.
The fact that companies have to obtain various certificates, which is related to quite
heavy expenses, did not cause major protests among representatives of Georgian
business. They spoke about this issue as a component being necessary for exporting. In
individual cases, an opinion was expressed that meeting such high standards will
promote the development of business and production and that it is not a barrier for
sale of products.
Assessment of DCFTA
During the research, the absolute majority of respondents had a generally positive
attitude to the signing of the free trade agreement, though it turned out rather difficult
for them to substantiate their attitude and provide concrete examples as for a positive
effect the agreement had on the Georgian business. At the same time, the majority of
the respondents stressed that they slightly experienced this effect on their business.
In individual cases the following changes were mentioned:
- Business was exempt from the export tax, though all respondents unanimously said
that they had not paid it before either. According to their supposition, the benefit more
affected companies working in other spheres;
- Confidence for Georgian produce has risen – the fact that the EU expressed its
confidence in Georgia extended to business partners as well and, accordingly, the
demand for Georgian products have increased.
- Quality control was tightened – according to the changed regulations, phytosanitary
certificates are only issued if a representative of the Ministry of Agriculture attends the
cargo sealing procedure.
Economics 81
- Single standards were elaborated – now the European Union and Georgia have
uniform standards. Accordingly, there is no need for local assorting of delivered
products.
Conclusions and recommendations
Application of DCFTA will be beneficiary for Georgia from the viewpoint of promoting
the welfare of those citizens who will have access to better quality products on the
home market and, over the longer term, increase their income due to stimulated new
business opportunities and economic growth resulting from integration with Europe.
The experience of the application of preferential trade regimes proves that trade
clearly tends to the products to which the mentioned preferences are applied. Among
noteworthy possible significant challenges, there will be increased import from the
European Union and additional pressure on local producers, especially in the initial
period, supplemented by increased cost of products driven by a strict requirement to
comply with the EU standards.
With the purpose of alleviation of possible side effects caused by application of DCFTA
agreement, it will be expedient to take into account the following recommendations. It
is necessary to elaborate mid and long-term strategies for the agricultural sector, with
an assessment of its export potential and determination of the sectors in which Georgia
may have a competitive advantage. Assessment of the country’s competitive advantage
from the viewpoint of agricultural production with more focus on promising spheres in
the initial period, which implies a redistribution of the accumulated profits to other
spheres in the subsequent period. Particular emphasis should be laid on the correct
application of technical and financial assistance rendered by the EU, with the purpose
of getting tangible results.
With the purpose of easing pressure on local producers caused by a probable increase
in agricultural import from the EU countries, the government should elaborate
purpose-oriented sectoral programs and initiatives aimed at increasing of export
potential in concrete sectors. These initiatives should be, first, oriented to rendering
assistance to local producers, so that they could successfully meet the EU’s respective
regulations and standardization procedures.
As it was mentioned above, one of the important challenges will consist of meeting the
requirements determined by nontariff measures. In this regard, priority should be
given to assistance in certification procedures, holding consultations, increasing the
role of farmers’ houses and training centers.
Information availability, along with training and education, is of key importance to
producers. One of the successful ways of overcoming asymmetric information can
consist in the creation of a guide for producers, which will contain production related
information, particularly as to how implement export to the EU countries. The guide
should be very concrete and contain information on tariff and nontariff barriers. The
web portal of the Ministry of Economy and Sustainable Development of Georgia was
initially created for this purpose, but now it is very voluminous and does not contain
concrete information on sectoral products according to product codes. An information
campaign will help people involved in the agro business to better use their capabilities
82 Strategica 2016
and comprehend the challenges. The EU’s role in the mentioned process implies a clear
explanation of concrete articles of the association agreement, which are difficult to
comprehend by mere reading and somewhat contradictory.
In general, the agreement on Deep and Comprehensive Free Trade Area, as a part of
Georgia-EU Association Agreement, is an important step towards integration into
Europe. This process has already been successfully implemented in several countries.
The agreement will contribute to Georgia’s economic development from the viewpoint
of the creation of a favorable business environment, increasing the country’s
attractiveness for investors (particularly in the agricultural sphere) and raising export
trade indicators.
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Websites
http://eeas.europa.eu
http://www.economy.ge
http://exporthelp.europa.eu/thdapp/index.htm
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84 Strategica 2016
STATISTICAL INDICATORS WHICH CAN BE RELEVANT FOR THE
STUDY OF BUSINESS FLUCTUATIONS:
A FEW EXAMPLES BASED ON THE ROMANIAN ECONOMY
Alexandru PĂTRUȚI
Bucharest University of Economic Studies
6 Piata Romana, 1st district, 010374, Romania
alexandru.patruti@rei.ase.ro
Matei APĂVĂLOAEI
Bucharest University of Economic Studies
6 Piata Romana, 1st district, 010374, Romania
matei.apavaloaei@rei.ase.ro
Abstract. Numerous economists attempted to offer different explanations for the
occurrence of business cycles. However, we argue that the most consistent from an
economic perspective is the so-called „circulation credit theory of the business cycle”. If
booms and busts are the effects of monetary causes, the question we would like to address
is whether there are any statistical indicators that can be used as proxies to illustrate
macroeconomic tendencies. Proposed indicators include, but are not limited to, GDP, the
reference interest rate and the intermediary money supply (M2). Statistical data
concerning the Romanian economy will be collected and used in order to formulate policy
suggestions.
Keywords: business cycles; the circulation credit theory of the trade cycle; the reference
interest rate; monetary aggregates.
Introduction
Business fluctuations are among the most interesting, and relevant topics, in the field
of economic research. Given the importance of this particular subject, it is to a certain
degree understandable, that dissent will continue to persist between economists
relating to the causes that determine business fluctuations. However, the main purpose
of the present paper will not be to demonstrate that the theory that we hold on to,
namely the „circulation credit theory of the business cycle” is the correct one. That has
been done in numerous other papers (Apăvăloaei, 2015; Pătruți, 2016). What we do
aim at is to show that there are a number of statistical indicators which can be used to
illustrate the aforementioned theory. It is indeed highly debatable whether the
indicators can be used to “predict” future fluctuations. However, they can provide both
researchers and policymakers with valuable information concerning the present state
of the economy. The main statistical indicators that we will employ will be used to
describe some broad categories, such as the money supply (M1, M2), the interest rate
(the reference interest rate), different variations in price levels (CPI, PPI) and
aggregated output (GDP, GDP growth).
Economics 85
The circulation credit theory in brief (literature review)
The circulation credit theory is usually associated (in one of its earliest forms) with the
writings of the so-called British Currency School, in their famous controversy with the
Banking School (Viner, 1965). Their main point was that an increase in the supply of
money in a society brings with it negative consequences for the economy, namely price
inflation. The currency school was so influent in the 19th century, that in 1844 an act
was adopted under the government of Robert Peel (De Soto, 2006). This act severely
limited the capacity of banks to issue new banknotes, in the attempt to keep a constant
supply of money and to stop any monetary increases in prices.
However, it was only under the hands of the two renowned Austrians economists,
Ludwig von Mises (1953) and Friedrich von Hayek (2008), that the circulating credit
theory achieved its most elaborate form. By complementing the quantity theory of
money with the subtle interest rate analysis made by the Swedish economist Knut
Wicksell (1989), the Austrian school of economics managed to explain business cycles
as direct consequences of fractional reserve banking, that expands circulation credit by
creating bank deposits subject to check in excess of available reserves (Mises, 2008, p.
569), and of monetary interventions, which exacerbates circulation credit creation by
limiting competition between banks and by creating moral hazard. More specifically,
due to inflationary government intervention, interest rates are kept artificially low in
order to stimulate credit (Strigl, 1934; Mises, 1998; Hayek, 2008). This cheap money
policy diverts resources away from existing (productive!) industries, modifying the
current structure of production (Hayek, 2008). Generally, resources are drawn away
from consumer goods industries, and their immediate suppliers, towards industries
that are further away from the final consumer (i.e. capital goods industries).
If the circulation credit theory holds 1, then every economic boom must be
accompanied by an increase in the money supply and a decrease in the interest rate
and every bust must be accompanied by the opposite – namely an increase in the
interest rate and a decrease in the growth of credit. During the boom phase of the
cycle, artificially lowered interest rates lead to both longer investment projects and to
increasing levels of consumption. It should be noted that the circulation credit theory
of the business cycle is not an “overinvestment” based explanation, but one that
emphasizes the distorting effect of lower interest rates upon entrepreneurial
investment decisions (by altering monetary calculation it leads to malinvestments and
capital consumption), which are concomitantly coupled with higher levels of
consumption. These two opposing forces (more roundabout investment projects and
higher consumption) must invariably lead to a tension in real resources, and therefore
to an inevitable bust.
We also point out a more subtle aspect of the circulation credit theory, namely that
generally producer prices are expected to vary to a greater degree than (and
correspondingly prior to) consumer prices (Mises, 1998; Hayek, 2008). These are the
main theoretical propositions that we will further try to illustrate empirically. It is not
necessary, in our opinion to use complex statistical and econometric methodologies to
prove our main point. Analyzing time series with the use of charts and graphs will be
sufficient in this case to illustrate our theoretical propositions.
1It is equally correct to refer to this theory as Austrian business cycle theory (usually abbreviated ABC theory).
From now on in the present paper the two denominations will be used interchangeably.
86 Strategica 2016
Analyzing the Romanian economy
As mentioned earlier, the main purpose of the present analysis will be to see whether
statistical indicators can give us valuable information concerning the state of the
Romanian economy. Of course, the same analysis can be applied in principle to any
country with the aim of illustrating the occurrence and dynamics of general business
cycles. We would like to point out that in order to gather empirical information about
economic fluctuations at a particular point in time, both researchers and policy makers
should pay attention to specific monetary variables such as the money supply, the
interest rate and the variations in price levels. They can then attempt to deduce and
illustrate the impact of these pecuniary factors on the real economy. A subsection will
be dedicated to each of the three phenomena.
The time period under consideration is roughly between 2005 and 2015, thus
including an economic boom (2005-2008), the corresponding depression (2009-2011)
and what appears to be the early signs of an incipient boom phase (2011-present). It
will further be shown that the Romanian economy has a few interesting particularities,
that need to be interpreted correctly in order to understand the current situation (and
possibly to anticipate future events).
The money supply
We mentioned earlier that according to the theory, every boom must be inflationary in
nature. It stems from monetary creation, which in turn can translate into price
inflation, the extent, and timing of which varies from one particular (historical)
situation to another. Thus, in parallel with an increase in GDP growth, there must be a
corresponding increase in the stock of money2. In order to approximate the quantity of
money in the Romanian economy, we will use M2 – or what economists usually call the
intermediary money supply. M2 contains the monetary base M1 (which includes coins,
banknotes, and deposits which are convertible on demand) plus time deposits with a
maturity of fewer than 2 years (National Bank of Romania, 2016).
Given the fact that economic booms are usually defined as periods of increasing
prosperity3, statisticians generally use GDP growth to determine the phase of the cycle
a country is in. Let us take Romania for example. Figure 1 below shows the GDP growth
in Romania from 2005 until 2015.
Figure 1. GDP Growth (Eurostat)
2 It is indeed true that measurement of GDP growth can almost totally fall prey to inflation. More specifically, it is
possible for a country to encounter a situation in which the allegedly growth in GPD is strictly due to the increase
in monetary stock. Adjusting GDP growth with variations in the Consumer Price Index does not (completely)
alleviate the monetary effects of inflation. However, it is not the role of the present paper to explore the limits of
macroeconomic variables. For such a critic and alternatives to GDP calculation, see De Soto (Money, Bank Credit
and Economic Cycles, 2006).
3 Of course, if ABC theory is correct, booms only create the illusion of prosperity (Pătruți, 2016).
Economics 87
It is easy to observe that, if we consider that variation in GDP reflects variations in a
country’s prosperity, Romania entered in the upward trend of the cycle in 2005, with
rates of growth which culminated with a figure of 8.5 percent in 2008. The year 2009
market the beginning of the crisis, with an equally impressive drop in GDP of
approximately 7 percent. The depression persisted until the end of 2010, while 2011
and 2012 saw meager rates of growth. It was not until 2013 when the Romanian
economy started to increase at a steady rate of a little over 3 percent for the next 3
years.
However, what we are interested in is to see whether the 2005-2008 boom was
sustainable (based on an increase in capital and a corresponding increase in
productivity) or was it an artificial “overheating” of the economy based on inflationary
credit. This question is relatively easy to answer if we take a look at the variation in the
intermediary money supply M2. Figure 2 pictures the percentage increase in M2 from
one year to another for the period 2006 to 2016 Romania.
Figure 2. YoY percentage increase in M2 (NBR)
By studying the graph one can clearly point out to the fact that the ascending phase of
the cycle in Romania was inflationary in nature. The authorities increased to money
supply with approximately 30 percent in 2006, 20 percent in 2007 and 40 percent in
2008. The stock of money nearly doubled in a three year period. The corresponding
increase in prices (and the corresponding increase in payments to the factors of
production) generated the illusion of a robust rise in the general prosperity of the
country. From 2010 onwards, the rise in the money supply from one year to another
was only moderate and did not surpass the 10 percent limit.
The interest rate
A business cycle analysis without a corresponding historical study of the interest rate
would entirely miss its own point. If prices in general transfer knowledge (Hayek F. A.,
1945), then the interest rate is the main price which gives entrepreneurs information
regarding the amount of saved resources (Strigl, 1934). A low-interest rate means that
saved resources (capital) are abundant, while a high-interest rate signifies a scarcity of
saved resources.
However, the money market today is heavily regulated and government intervention
makes it possible for the market interest rate to permanently deviate from its
equilibrium position. One way in which the monetary authorities influence the price of
money is through the reference interest rate. Figure 3 shows how this indicator
fluctuated between 2007 and 2016.
88 Strategica 2016
Figure 3. Evolution of the Reference Interest Rate (NBR)
It is not complicated to observe that the crisis was triggered at the end of 2008 when
monetary authorities decided to increase the reference interest rate at a record high
level of 10.25 percent. After the Romanian economy fell into a recession due to the
(necessary) credit contraction, until this day the authorities have been desperately
decreasing the reference interest rate in the attempt to “jumpstart” the economy. This
indicator has reached a historically low level of 1.75 percent in the present (may
2016). Minimum reserves requirements have also been continuously relaxed,
currently reaching a historical low, namely at 8 percent for RON and 12 percent for
foreign currencies.
After observing the sustained effort undertaken by the monetary authorities to
encourage bank lending, one may be puzzled by the fact that the Romanian economy is
not in a new inflationary boom, similar to the one in 2006-2008. One reason can be the
fact that entrepreneurs and households are rather prudent when it comes to
contracting new loans, particularly due to regime uncertainty (Higgs, 1997) i.e.
frequent regulation and fiscal changes, international slowdown and unorthodox
monetary policies, and to the entrepreneurs’ temporary loss of confidence in their
ability to forecast future market conditions and in the reliability of monetary
calculation (Salerno, 2012).
At the same time, the two deterring elements mentioned above, regime uncertainty
and temporary confidence loss, also plague the banking system. Lending institutions
have practiced a rather conservative lending policy, despite their increased level of
liquidities. As can be observed in Figure 4, the interbank lending rate is at a historical
low, even when compared to pre-crisis levels. The ROBOR has even entered negative
territory if one takes inflation into account, with 2010-2011 witnessing negative real
interest rates. But even under these circumstances, lending increased only slowly. This
was mainly due to a high degree of non-performing loans, which are the symptom of
the late 2000s boom years and which have recently entered the attention of the NBR,
and legislative initiatives like the “walk away from law”4.
4 On April 28th, the mortgage walk bill was signed into law. Despite raising the opposition of the banking sector and
of the NBR, the bill was passed by the Romanian Parliament, after some modifications prompted by an initial veto
from the president, and then signed into law. This piece of legislation allows debtors to give up the real estate
property that was backing up the mortgage loan they contracted, while forcing the bank to accept it as payment.
The law applies only to residential loans, has an upper bound cap of 250,000 euros, and excludes mortgage loans
for first time buyers that were guaranteed by a state program. The walk away bill has increased the uncertainty
Economics 89
Figure 4. Evolution of the interbank interest rate and inflation (NBR)
The banking sector seems to have re-entered a growing phase since the second half of
2015, with the volume of loans reaching two-digit growth levels when looking at loans
denominated in local currency. Figure 5 clearly shows that overall loan figures, which
include foreign currency denominated loans, can prove deceivingly calm in
comparison to loans contracted in RON, which increased by 18 percent in April 2016,
as compared with previous year figures.
Figure 5. YoY figures for loans denominated in all currencies and those denominated only in
RON (NBR)
Banks seem to have followed the trend imposed by the central bank. Figure 6
graphically illustrates the evolution of the lending interest rate of commercial banks in
Romania.
associated with contracting a housing loan (especially because the law is retroactive), while also increasing the risk
premiums charged by the banks (i.e. the initial contribution required from the lender when contracting a housing
loan).
90 Strategica 2016
Figure 6. Evolution of the Lending Interest Rates (World Bank)
We can see that the interest rate practiced by commercial banks for short and medium-
term credits are considerably above the levels of the reference interest rate. But even
so, credit is cheaper now than in the previous boom period (2006-2008), so there are
good reasons to suspect that a new upward phase is an incipient. This assertion can be
further substantiated if one takes into consideration the evolution that characterized
the 2005-2008 boom years and the following policies that were implemented in order
to combat the effects of the bust.
According to the circulation credit theory of the business cycle, the bust necessary
follows the boom period, but the best remedy to make the contraction period as short
as possible, and the only method of resetting the economy and its production structure
on a sustainable path, is for the public authorities to abstain from any tampering with
the market. Any attempt to boost aggregate demand, or to avoid the deflationist
pressure that follows the rising demand for money, can only redistribute resources
(not create them) while sewing the seeds for more malinvestment and exacerbating
uncertainty (Rothbard, 2000). But during the Great Recession, policymakers
considered such laissez-faire remedies to be too drastic, therefore opting for Keynesian
and monetarist schemes. Romania was no exception: the country witnessed tax hikes,
increases in the money supply, the introduction of new legislation, international
bailouts, and special access to resources and guarantees for certain sectors. One such
sector was represented by real estate, the sector that bubbled over in 2008, and that
was never allowed to fully adjust after the bust. Easy money policies, coupled with
state-backed guarantees (“Prima casa” program started in 2009) and pro-debtor
legislation (conversion of foreign currency loans and the walk away legislation) have
hampered the restructuring of the market, mainly in the direction of propping up
housing prices and keeping mortgage-backed loans at low-interest rates. Given these
particular circumstances, we can expect that during the next boom and the following
contraction, the real estate market is going to play a central role in next cyclical
debacle that is currently beginning its upward phase. Without attempting to go into an
analysis pertaining to real estate volumes and values, especially given the specificities
of this location dependent market par excellence, we are simply going to point to the
evolution of loans contracted for real estate purposes in order to support our
argument.
As it can be observed in Figure 7, the loan structure of the credits contracted by
households has changed substantially over the years, as real estate loans grew in share
from approximately 20 percent of the total loans contracted by households, to some 48
percent by the end of 2015.
Economics 91
Figure 7. Loan structure for credits contracted by households (NBR)
Another indication of a new emerging bubble in real estate can be observed by looking
at the yearly evolution of loans contracted by households for housing purposes. As
Figure 8 indicates, RON-denominated housing loans have accelerated to levels well
above those incurred overall by households (in foreign and RON currencies).
Currently, housing loans denominated in RON represent 10 percent of the entire
lending that is contracted exclusively in local currency. Although this figure does not
seem to be too large when taken alone, one must note that at the end of 2007, the same
figure was only 1 percent.
Figure 8. YoY figures for housing loans denominated in all currencies and those
denominated only in RON (NBR)
Let us now move forward to the next phase of the analysis, namely the evolution of
price levels.
Evolution in price levels
In most historical instances of the business cycles, we can observe that prices of
production goods usually fluctuate stronger and prior to the prices of consumer goods,
when the money supply is increased. The easiest way to make this comparison is to
look at the evolution of statistical price indexes. In this case, we studied variations in
the producer price index in parallel with variation in the consumers’ price index (CPI)
in Romania between 2005 and 2015. Figure 9 depicts the data.
92 Strategica 2016
Figure 9. Comparative evolution of PPI and CPI (Eurostat, NBR)
In this case, advanced statistical regression and correlation methodology is
unnecessary to realize that the two trend lines are indeed correlated. The evolution of
the PPI anticipates the evolution of the CPI. Also, we can observe that the PPI varies to
a greater degree than the CPI, illustrating the theoretical premise that an increase in
the monetary stock first affects the higher levels of the production structure, namely
the prices of capital goods which are more remote from the final consumer.
There is only one problem which arouses our interest. In 2015, both the IPP and the
IPC registered negative values, which suggest that the economy has reached a
deflationary state. However, this is relatively strange given the fact that there was an
increase in M2 from 2014 to 2015 of approximately 7.8 percent 5. Although the increase
was modest when compared to pre-crisis levels, it is hard to justify that coexistence of
more money in the economy and generally lower prices. This fact seems to fly in the
face of the quantity theory of money6, namely that an increase in the total quantity of
money leads to ceteris paribus higher prices. A hypothetical rise in the demand for
money could have overcompensated the increase in money supply. This is not hard to
grasp, given the uncertain business and legislative environment that has characterized
the Romanian economy since the 2008 bust. But even if this were the case, the demand
for money cannot remain high for an indefinite time horizon. Consumer expectations
are going to adapt and incorporate the falling purchasing power of the currency in
their decision to hold money. Both the NBR and the IMF have already noted that
monetary policy will have to be carefully monitored and prepared for a transition to a
tighter monetary stance (IMF, 2016a), given forecasts of CORE2 inflation for 2017.
Although we understand the limits of the quantity theory of money, especially its
mechanistic bias that ignores human action, in the following graph we attempt to
provide a visual representation of the current decoupling of consumers’ inflation
expectations, as reflected by the actual CPI figures, and the M1 monetary aggregate
5 It is true on the other hand that a longer term view, like for example between January 2007 and January 2016,
indicates a 167 percent increase of M2.
6 The quantity theory of money suggests that variations in the quantity of money will lead to a similar variations
(whether proportional or not) in the price level of that economy. One of its more primitive version would be
Fisher’s (1913) renown equation M V = P Q.
Economics 93
divided by real GDP figures. Theoretically, the two sides of the equation of exchange
should be equal. The balancing element is made out of v, the velocity of money, or the
number of transactions each monetary unit intermediates. In our calculations, we have
assumed v to constant, thus eliminating it from our calculations. Therefore, any
difference between increases of M/Q and those of P are going to be made up for in the
future through the decisions of economic agents to hold on to a certain quantity of
money.
Figure 10. Unanticipated monetary increase in inflation rate (Eurostat, NBR, IMF)
As Figure 10 above indicates, boom phases witness a temporary decoupling of inflation
expectations, as indicated by actual consumer price inflation, from money supply
divided by real output. The wedge between the two lines that depict the two indicators
was noticeable at the end on 2012, the first year after the crisis that witnessed a pickup
in lending. Therefore, the decoupling of the two lines appeared before the current
disinflation period that was brought about by fiscal easing and a boom in raw materials
output in international markets. In this context, the IMF has already cautioned the
Romanian authorities in matters concerning the pickup in inflation, another symptom
of which can be found in the wage increases that are faster than productivity gains
(IMF, 2016b). See figure 11 below.
Figure 11. Wage increases outpace productivity (IMF Staff Report)
94 Strategica 2016
Conclusion
As we have shown in the present article, one can use statistical indicators to illustrate
the circulation credit theory of the business cycle and also to gather relevant
information that allows us to make informed judgments regarding the phase of the
business cycle that characterizes the status quo. The main indicators that were
employed in the present analysis are those describing the historic evolution of the
money supply, interest rates, and prices.
Although the last boom-bust cycle in Romania is vividly illustrated by the above-
mentioned cycle theory, the present situation appears, at first sight, to be somewhat
more complex. We are presently witnessing a period of economic growth, coupled with
a moderate increase in the money supply and price deflation (as reflected by the
evolutions in CPI and PPI).
The explanation we have advanced for this outcome is based, on the one hand, on the
fact that the demand for money has over-compensated the increased money supply.
Due to regime uncertainty and temporary loss of confidence in forecasting and
monetary calculation, both banks and entrepreneurs appear to have become prudent
with regard to contracting new loans, in spite of the efforts made by authorities to
boost credit. On the other hand, high government intervention in the housing market
and the increase in real estate loans contracted by the households seem to be pulling in
the opposite direction, shaking the stability of this sector, which will most probably
play a major role in the next economic crisis.
In spite of the statistically measured decrease in the level of prices and to the
somewhat moderate increase in the money supply, early signs of an incipient boom
can be observed. One need only to take a closer look at the national currency
denominated loans and consider the effects of public policy measures aimed at
propping up the housing market. As we have shown above, monetary authorities
appear determined to spare no effort in the attempt to “jumpstart” the economy, the
consequences of which are beginning to become manifest.
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96 Strategica 2016
GLOBALIZATION IN THE TOURISM INDUSTRY AND ITS IMPACT ON
TRAVEL DESTINATIONS. CASE STUDY OF UNDEVELOPED BEACHES
ON THE ROMANIAN BLACK SEA COAST
Silvia Patricia DODU
Romanian-American University
1B Expozitiei Blvd., Sector 1, Bucharest, Romania
patricia_dodu@yahoo.com
Ioana Cristiana PATRICHI
Romanian-American University
1B Expozitiei Blvd., Sector 1, Bucharest, Romania
ioanapatrichi@yahoo.com
Daniela FIROIU
Romanian-American University
1B Expozitiei Blvd., Sector 1, Bucharest, Romania
danafiroiu@yahoo.com
Abstract. The need for sustainable development has generated important new
approaches and transformations in all economic sectors, through legislative efforts and
other measures reflected in international, regional and local strategies. The tourism
industry was among the first ones to signal a prompt adjustment to this concept of
sustainable development, mainly due to its significant social and human component and
the critical importance of the environmental factor for its success. Tourism cannot exist
without high quality, a clean and attractive natural environment – the "raw material"
used by this industry. A healthy natural environment, beautiful and eye-catching
landscapes and the conservation of the travel resources and destinations make up the
foundation the long-term, sustainable tourism activities. The correlation between the
economic performance of tourism companies and the environmental protection efforts, in
addition to the strategic measures of limiting travel flows, is the starting point of the
analysis covered in this paper. Romania is joining the ranks of the countries with real
opportunities for enhancing the performance of their tourism industries and this is the
key reason why identifying how the current needs of the entrepreneurs in the tourism
industry correlate with their customers' needs is a critical issue that can be examined and
evaluated as part of immediately applicable strategies, put together both by the local
authorities from the travel destinations (with, or without, particularly intense tourist
flows) and by the companies active in the tourism industry. This paper aims to analyze a
set of specific metrics that quantify the pressure level generated by tourism activities and
the maximum pressure levels from such activities that can be tolerated by travel
destinations that include protected undeveloped beaches. The findings of this analysis
could provide input into the strategies for sustainable management of the protected
areas with tourism potential, such as the Vadu, Corbu, Gura Portitei, Sulina undeveloped
beaches.
Keywords: sustainable development; globalization; tourism pressure; protecting natural
resources; coastal tourism.
Economics 97
Introduction
The consolidation and accelerated growth of globalization are fundamentally reflected
in the tourism and travel industry – both at a generic level, as well as at a more detail-
oriented one. Globalization has resulted into an internationalization of demand for
travel services, while the free flows of tourists across national borders and the
deregulation of the airline industry have led to the creation of a global travel market
and an upsurge of the tourism phenomenon across most of the world's countries and
regions. The tourism industry is seen as a key engine of economic development, a
panacea or universal remedy for all the economic ills. However, this triggers an
important question: how sustainable today's tourism industry really is?
Nowadays, the pressure exercised by tourism on destinations is no longer merely a
theoretical concept; it is a visible reality, which materializes in environmental
degradation, in that of sites, which becomes upsetting for the masses of holiday
seekers.
The rapid development of tourism has engendered prosperity for the communities in
which it has been implemented, but, at the same time, the negative consequences of
social, cultural and environmental impact have created significant misbalances, the
effects of which have been eradicated later with great difficulty. At present, tourism
reflects, just like the rest of the economic sectors, the theories of orientation towards
development, through the inclusion of social desiderata and of economic growth in
harmony with the natural environment. It is the phase of alternative tourism, which
includes concern for the environment, for limiting the impact of tourist pressure on
ecosystems, for the preservation of tourist flows within the boundaries of the
parameters expressing what the environment can withstand.
First, for the tourist to be able to contribute to the sustainable development of the
economy, s/he needs to integrate the natural, cultural and human environment and,
above all, to mind the fragile balance that characterizes many tourist destinations.
The tourism industry reunites all the necessary characteristics in order to become a
leader of the new order imposed by sustainable development, and “not out of
philanthropic impulses, but out of its long-term interest in applying sustainability”
(Reid, 2003). Starting from this premise, we can admit that tourism has, from an
ecological perspective, the objective of introducing, in all sectors of activity, measures
and regulations meant to reduce its negative impact on the environment by limiting
tourist circulation and pressure on the latter, through actions regarding the
conservation and protection of biodiversity and the integrity of the ambient
component through strategies on making the use of natural resources efficient.
The global development of tourism had as a main trigger coastal tourism, the form
with the greatest dynamic, in most cases being thought of as mass tourism. Dependent
on natural resources (climate, landscape, ecosystems), the development of coastal
tourism has been and continues to be affected by climatic conditions or unforeseen
events, a reason for which the unfolding of specific activities cannot be achieved unless
there are adequate conditions connected with the corresponding infrastructure that
takes up resources and has direct effects on the environment.
98 Strategica 2016
Based on these facts, the decisions regarding the development of coastal tourism most
often rely on financial grounds rather than on ecological ones, to the detriment of the
latter, resulting in unsustainable development with a negative impact on the
environment and on local communities. Among the negative effects of the development
of coastal tourism we can count: the destruction of ecosystems, pollution, the
modification of the natural landscape, urban expansion, the pressure put on sensitive
areas, waste production, and, last but not least, the degradation of beaches due to the
massive presence of tourists, which is beyond the physical limit that these can
withstand.
At a global level, coastal tourism registers the most rapid expansion in the past few
decades, outnumbering all the other forms of tourism – almost 60% of European
tourists prefer coastal destinations. The Eurostat estimate regarding the expansion of
coastal tourism in 2025 is of 312 million tourists in Europe only at the level of the
Mediterranean Sea. Coastal tourism at a European level generates approximately 200
billion Euros as a contribution to the gross domestic product and 3 million workplaces
(Eurostat, 2013). In this context, the Black Sea is an option for coastal tourism at a
European level, even more so as the areas on the Bulgarian and Romanian coasts are
considered low risk when it comes to terrorism. In other words, the tourist pressure
specific for the Mediterranean area is likely to migrate to these new areas.
“Beaches are used by more people than any other habitat in the coastal zone. Beaches
are the focal point for international coastal recreation and tourism. People are willing
to travel thousands of miles and spend thousands of dollars to lie, sit, or walk on the
beach” (Salm, 2000, p.232). To put it differently, ecotourism, a form of sustainable
tourism, which enforces more constraints for the environment, is concentrated inland,
around the national parks and private reserves, while, generally, most coastal tourism
is on a larger scale and caters to more of a mass tourism market (CESD, 2007, p.32).
Briefly, coastal tourism and ecological tourism are rather theoretical concepts than
practical ones.
“Although mass tourism was originally embraced by many countries as a “smokeless”
(nonpolluting) industry that could increase employment and gross national product,
evidence quickly grew that its economic benefits were marginal and its social and
environmental costs high. Much of the money did not stay in the host country, and
often the only benefit to the local community was found in low-paying service-level
employment as maids, waiters, and drivers” (CESD, 2007, p.66). Also, coastal
destinations have begun to disappoint, most of the times the agglomeration, traffic
jams, noise pollution, as well as air, soil and water pollution, the degradation of the
beauty of the landscape through urbanization or the intensification of human activity
linked with tourist activities destroy the attractiveness of the area for tourism.
Tourist pressure and carrying capacity
At present, at the level of all coastal destinations, a phenomenon of marked pressure
can be noticed, generated by numerous factors such as climatic change, coastal erosion,
the expansion of specific and general tourism infrastructure, intense coastal
urbanization, pollution, physical pressure of tourists in sensitive areas (beaches,
coastal protected areas). Moreover, human pervasiveness should enter the definition
Economics 99
of coastal tourism, as it has been demonstrated that, in those destinations where
tourism has a negative image, this is most of the times due to either the high numbers
of tourists or excessive development, much over the carrying capacity of the respective
destination.
Table 1. Indicators of sustainable tourism according to UNWTO (2004)
Indicators Specific measures
[1] Protection of sites Establishing the site category within UICN
classification
[2] Stress Quantification of the number of tourists that visit
the site (yearly/peak months)
[3] Intensity of use Intensity of use during peak periods
(tourists/hectare)
[4] Social impact Ratio between the number of tourists and that of
the local people
[5] Control Application of control measures
[6] Waste management Quantification of the volume of waste resulting
from tourist activities and not only
[7] Planning Drawing up a regional development plan
Quantification of rare species or of endangered
[8] Fragile ecosystems species
Quantification of the degree of tourist satisfaction
[9] Consumer satisfaction (based on inquiries)
[10] Satisfaction of local people Quantification of the degree of satisfaction of the
local people (based on inquiries)
[11] Tourist contribution to the Quantification of the impact of tourism on the
local economy local economy
Aggregate indicators
A. – carrying capacity An aggregate means of measuring that draws
attention from the start on the key factors that
influence the carrying capacity of the site in
B. – site disturbance relation to the various levels of tourism
development
An aggregate means of measuring the levels of
C. - interest impact on the site in order to find out the natural
and cultural particularities under the effect of
cumulative constraints from tourism and other
sectors
An aggregate means of measuring the
particularities of the site which make it attractive
for tourism and which can change with time
The concept of “carrying capacity” in tourism can refer to “the number of tourists that
a certain place can receive, without putting pressure on either the environment or the
host population and, at the same time, without diminishing tourist satisfaction”
(Patrichi, 2012). According to Dumbraveanu (2013) it can be:
- the ecological carrying capacity represents the level/limit of use above which
ecological risk and negative ecological impact emerge;
100 Strategica 2016
- the economic carrying capacity consists in the level or limit of use above which local
economy relies mostly on tourism and becomes dependent on it;
- the social carrying capacity is given by the level above which tourists become
annoying to the locals or affect the local culture;
- the psychological carrying capacity is represented by the level of which tourists feel
discomfort and insatisfaction because of the tourism agglomeration.
Starting from beach degradation, intensified and extensive construction of
infrastructure, urban planning which impacts the environment, landscaping and beach
carrying capacity, this paper highlights a situation faced by many other tourist
destinations in the world nowadays, namely the pressure applied by aggressive
development in coastal areas, a pressure resulting from the desire of real estate agents,
of local authorities, of demand for residential tourism and of the second homeowner to
put their mark on a new territory, namely, on the last wild beaches in Vadu-Corbu,
Gura Portitei, Sulina and Sfantul Gheorghe. This paper focuses on the study of Corbu
and Vadu beaches.
In order to show the present-day situation of coastal tourism in the area near Corbu-
Vadu beaches, respectively the coastal area, the cities of Constanta, Navodari and
Ovidiu, we present in what follows the main indicators that characterize the specific
infrastructure in tourist circulation. We can notice from figure 1 that, during the period
we have analyzed, from the point of view of tourist demand, there is an important
dynamic, between 18-22%, for the total number of arrivals, respectively for the
overnights. This situation of the tourist circulation dynamics, in relation with a relative
stagnation of investment in hotel infrastructure, generates additional pressure on the
adjacent areas, including the beaches of Vadu and Corbu.
The village of Corbu is in the north part of the municipality of Constanta, 23 kilometers
away, and it is mainly an agricultural area. Due to its geographic position on the coast
of the Black Sea and in the south of the Danube Delta Biosphere Reservation, the Corbu
village has a high tourist potential which can be capitalized on according to the
principle of sustainability by granting more attention to environmental preservation,
respectively to the preservation of those elements of biodiversity which have
determined a great part of the village surface to receive the status of protected natural
area.
Hence, 8.372 hectares of the area of Corbu village have been included in the perimeter
of the Danube Delta Biosphere Reservation, the beaches are known as Corbu and Vadu
included. They are part of Grindul Chituc, an integrally protected area included in the
Danube Delta Biosphere Reservation, having 2300 hectares.
Being considered a scientific reserve of a mixed type (the 4th category IUCN), the
Grindul Chituc area consists of a sandy hill of a marine lagoon type, having lakes with a
reduced exchange of water and partially covered with floating vegetation, hollows with
reed and bulrush, meadows and low marine hills as well as little consolidated coastal
meadows. The Corbu and Vadu beaches are among the last virgin beaches on the
Romanian coast, having fine-grained sand mixed with shells of sea snails in some areas
(Monography of Corbu Village, 2012).
Economics 101
Figure 1. Evolution of specific tourist circulation indicators and of accommodation
units Geographic delimitations (INSSE, 2016)
The protected areas in the Corbu and Vadu regions, according to Natura 2000:
-ROSCI 0065, with a total surface of 454.037 hectares is a vulnerable area through its
geographic position, ship circulation causing significant changes on the banks of the
canals through the phenomena of suction and wave, as well as noise and vibration
production that affect the fauna, especially during nesting and feeding.
-ROSCI 0066, with a surface of 123.374 hectares, it hosts important species of
protected birds. Intensely circulated roads within the area, agricultural portions with
various types of crops have a negative impact on the site.
-ROSPA 0031 the Danube Delta and the Razim Sinoe Complex, with a surface of
512.820 hectares, hosts important groups of species of protected birds.
-ROSPA 0076 the Black Sea has certain particularities given by the major influence of
the Danube waters and alluviation so that there are unique sedimentary habitats of the
Romanian coast.
The urban plans for Corbu, for which over 100 hectares are allocated, are the
following:
- the zonal urban plan “Introduction to urban areas and land parceling in view of
building permanent and seasonal dwellings, accommodation and eating units and
constructions corresponding to urban technical endowment and associated facilities”,
Corbu village, is situated outside the Corbu inhabited area, has a surface of 92.82
hectares, on the east of Corbu village, in the close proximity of the Black Sea (Adequate
Evaluation Study, Primaria Corbu, 2015).
102 Strategica 2016
- the zonal urban plan “Holliday village parceling with fishing specific 3”, Corbu village,
Constanta municipality, has 12.88 hectares, it is situated within the sites Natura 2000
ROSPA 0031 the Danube Delta and Razim-Sinoie Complex, ROSCI 0065 the Danube Delta,
in the near vicinity of the southern border of the two protected areas. Its purpose is to
build a holiday village for the summer peak season. (Adequate Evaluation Study,
Wildlife Management Consulting, 2015 p.3).
- the zonal urban plan Parcela 610/31- Its main objective is the parceling of the area to
the purpose of developing a residential complex. The whole surface is 5 000 sq. m. The
area was parceled before the elaboration of this zonal urban plan (PUZ), in seven
parcels, while the final surfaces needed to be between 337 sq. m. and 1020 meters. It is
situated inside the site Natura 2000 ROSPA0031 and close to the site Natura 2000
ROSCI0065. (Adequate Evaluation Study, Management Consulting, 2015, p. 23).
Figure 2. Image of the zonal urban plans: Corbu 92.822 ha (yellow) and holiday village with
fishing specific (blue) and the Parcela zonal urban plan 610/31 (green)
(taken from Corbu PUZ)
Surprisingly, after the analysis of the zonal urban plans in the region, although they
enter the protected geographic area included in the Danube Delta Reservation, what
comes out of the analysis is that the impact on the existing protected areas is minimal
or inexistent; moreover, it would be even useful to human activity. We realize that,
anyway, the areas in the discussion are the buffer zones for the protected area and that
the ecosystem has already been destroyed by agriculture, pasturing and tourism. The
three reported zonal urban plans indicate the important surface, of over 100 hectares,
that needs to be built, clearly and indubitably affecting the protected area, even more
so since the reservation will lose certain areas in favor of landowners. To these, other,
already built structures are added.
Economics 103
Legend: Yellow line-shape (contour) Corbu zonal urban plan 92.822 ha; Purple line-shape (contour): Danube Delta
Biosphere Reservation; Red line-shape (contour): ROSCI 0065, ROSCI 0066; Dark green line: ROSPA 0031 the Danube Delta
and Razim Sinoe Complex, ROSPA 0076 the Black Sea (taken from Corbu zonal urban plan).
Figure 3. Corbu zonal urban plan and the delimitations of protected areas
In order to exemplify the results of human activity intensification in sensitive areas, we
would like to consider now a brief analysis of the already modified area, between
Mamaia North resort and Navodari, which was, before present-day urbanization, a
protected area that is nowadays lost.
In the 90s, before the avalanche of constructions, Mamaia-Navodari was an arboreal
edge and wild vegetation area, well known for being the habitat of countless species
among which the boar, the fox, many species of birds and a specific flora. Because of
privatization of the respective lands and constructions, the area has suffered complex
changes, until the destruction of the ecosystem. Habitat destruction is reflected best by
the cases that have stirred many reactions in the years after 2000, linked with the boar
invasion in Mamaia. The boars, confused by the impact on the habitats and by their
hunting, entered hotels in Mamaia or even reached the center of Constanta. The
newspaper “Ziua” of Constanta published in September 2002: “Sources from the
County Hunting and Fishing Association have declared that these events, unique for
the area in question, have appeared due to deforestations of arboreal edges, approved
by Navodari City Hall for the construction of villas on the coast. In this way, the last
place on the coast where families of boars, deer and pheasants lived has been
destroyed.”
Figure 4. Urbanization in the formerly protected area between Mamaia and Năvodari
(Google Maps, 2016)
104 Strategica 2016
In the Naăvodari zonal urban plan, it is specified that, as far as the fauna/avifauna is
concerned, “in case certain species are inconvenienced by human presence, these can
be moved to areas that are less occupied with construction or even to natural protected
areas in the vicinity” (Environmental Report - Mamaia North Coast Area – Năvodari,
2014, p.71).
Figure 5. NĂVODARI zonal urban plan – Urban agglomeration in the coastal area Mamaia-
Năvodari (taken from Npvodari zonal urban plan, p.46)
If Năvodari restricts the habitats of species towards Corbu, and Corbu, through urban
planning, then pushes them farther towards Grindul Chituc, a phenomenon to which
pollution from refineries and the impact of industry and of the existence of the
shooting range from the military instruction camp get added, we may conclude that the
coup de grace for the wild beaches Corbu and Vadu will come from tourism, all these
surpassing the carrying capacity of the environment in a protected area.
What is strange is that in no adequate piece of research so far can we find the analysis
of the carrying capacity of the environment and the impact of intensified tourism
activity, especially since they are about sensitive, protected areas. According to
international regulations, tourism in protected areas is subject to special norms, and
the only accepted form of tourism is ecotourism (birdwatching, observing nature etc.).
“This type of tourism is associated with the minimal development of infrastructure and
small-scale interventions in areas of normally-strong control and restrictive
management. Carrying capacity issues concern the number of tourists, visitor flows
and spatial patterns of concentration/dispersion vis-à-vis the protection of nature and
the functioning of ecosystems but also the quality of experience of visitors.” (EPL
University of the Aegean, 2001, p.8).
Model regarding the sustainable development of the Corbu-Vadu area
Type of area: Protected wild beaches
Site value: we consider it invaluable, in the context in which virgin beaches have
become extremely rare at a European level.
Carrying capacity: in order to establish a starting point in the analysis of the carrying
capacity, we have taken into consideration the calculation model specific for resorts
destined for the sun and water cure resorts, according to INCDT.
Economics 105
Table 2. Characteristics and carrying capacity
Surface (sq. m.) 4000
Surface norm (sq. m./person) 4
Optimum carrying capacity of the beach: 1000
Daily carrying capacity of the beach: 1200
According to the results in the table above, for an optimum capacity of 1000 people, an
area of at least 4000 square meters needs to be reserved, taking into account 4
meters/person as the beach norm, double as the present standard for the unprotected
beaches.
Measuring accommodation capacity: We propose, for the Corbu-Vadu area, a capacity
of 1000 places, meaning 500 rooms. According to the regulations (Urban Planning
Regulations for the Danube Delta Biosphere Reservation), which stipulate that a
tourism unit of a hotel type cannot have more than 20 rooms, and pensions no more
than 10, it means that the accommodation infrastructure should have a maximum of 25
hotel units. This presupposes that the local authority should allow the development of
the accommodation infrastructure up to this threshold. By extrapolation, we take into
account one-night stay tourists as well, who frequent the same beach, generating in
their turn an important flow of tourists, which put physical pressure on the area.
Through the method of beach access tickets, this flow could be limited. At present,
ARBDD has put at the tourists’ disposal, as a first restrictive measure for disorganized
tourism, beach access tickets, which can be bought directly on the ARBDD website, for
the modest price of 5 lei per person per day, and 15 lei a week. In addition, car access
on the beach is strictly forbidden, just as camping, since there are special places for
these. At present, there is a certain type of disorganized tourism on the two beaches,
with negative effects on the beach (pollution, waste, car access) called off-
camping/trailer camping by those who perform it.
Measures: in the spirit of the ecotourism that we are advancing here, which involves
the development of the wild beach area, we are proposing a set of measures that would
aim at the future transformation of these virgin beaches into an exceptional USP of
Romania. We think that maintaining the integrity of the natural beauty of these
beaches, as well as that of the ecosystems can prove an invaluable gain for Romanian
coastal tourism. In this sense, we consider as viable a series of measures that can
represent a starting point for a sustainable model of coastal tourism in the Corbu-Vadu
area, from the point of view of both the investors and the local authorities.
At the level of the local authorities, the sustainable model can take into account the
following:
-The limitation of construction authorizations for more than 25 accommodation units,
so that the spatial norms for sustainable tourist usage of the beach area should be
observed, and in view of protecting the neighboring sensitive areas.
-An increase of beach access fees, which should contribute to attracting an educated,
informed and responsible customer segment
-Tours organized for birdwatching and nature watching along the coast – performed in
small groups, of maximum 20 people, accompanied by rangers who have been trained
for both monitoring and control of the area and for tourist guiding in responsible
tourism activities.
106 Strategica 2016
-Making sea itineraries for tourism unpolluting boats that would allow tourists to
admire the coast in its entirety. The itineraries could take the Corbu-Gura Portitei
route.
-Directing investments to the development of non-motor transport, respectively to
bicycling routes in the vicinity of the beaches (along the already formed ones by car
access)
-To the benefit of the community, we identify the opportunities created by the new
workplaces, of rangers, guides, waste collection, bicycle rent, drivers of means of
coastal transport to the beach, all being jobs that allow the requalification of
community members
-From the perspective of the investors, we consider as timely the directing lines of the
organization of competitions along the topic of “Sustainable investment in the virgin
beach areas”, which can be initiated by the local authority in partnership with ARBDD
and private investors.
Figure 6. Core set of indicators for sustainable performance (taken from EPL University of
the Aegean, 2001, p.27)
In this case, we recommend resorting to the methodology for evaluating the impact
indicators: physical–ecological, socio-demographic and political–economic indicators,
according to the model presented in the study (EPL University of the Aegean, 2001,
pp.11-25).
Conclusions
Although it can represent a feasible long and medium term economic opportunity, the
development of the Corbu-Vadu coastal area along the principles of sustainable
tourism needs to be approached through restrictive management, which should use
instruments of control and prevention of the negative effects of tourism on the coast.
Restrictive management has to envisage the limitation of chaotic, intensified and
extensive development of urban and tourism infrastructure, which characterizes the
area between Mamaia and Navodari nowadays. In addition, it must contain guiding
lines regarding the approval and implementation of solely sustainable projects for any
activity, a first step being an ample research study overall coastal area, not individual
studies on approved zonal plans like the ones that have been done so far.
Economics 107
Figure 7. Vadu Beach (by authors)
Tourism development of the Corbu-Vadu coastal area on sustainable principles may
become an alternative to coastal tourism, a different type of tourism, destined to
knowledgeable tourists who make ecotourism, who could enjoy, in this unique area,
not only the beauty of the natural landscape, but also the sun, sea and sand in a virgin,
unaltered territory.
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110 Strategica 2016
THE APPLICATION OF CLUSTER ANALYSIS IN MEASUREMENT OF
HUMAN DEVELOPMENT
Ingrid MAJEROVA
Silesian University in Opava
Univerzitni namesti 1934/3, 733 40 Karvina, Czech Republic
majerova@opf.slu.cz
Jan NEVIMA
Silesian University in Opava
Univerzitni namesti 1934/3, 733 40 Karvina, Czech Republic
nevima@opf.slu.cz
Abstract. Many methods of measurement were designed for comparison of human
development, the most popular being the Human Development Index (HDI), which has
been used since 1990. This index measures the level of human development by not only
GDP per capita but also trough the indicators of education and healthy life. The
differences in the level of human development are observed not only at the national level,
they are also measured at the regional level of countries. The aim of this article is, with
the quantification of regional human development, to describe the potential for human
development using cluster analysis at the regional level. The regions of the Visegrad
Group Plus countries (the countries of Visegrad Group - Czech Republic, Poland, Hungary,
Slovakia, and the countries of Regional Partnership Agreement, Austria, and Slovenia) at
NUTS II level were selected for this purpose. There are 46 regions on the NUTS II level –
eight in the Czech Republic, seven in Hungary, sixteen in Poland, nine in Austria, four in
Slovakia and two in Slovenia. The research was made in the period from 2004 to 2013. In
the selection of indicators, the same approaches as by the HDI were adopted; however,
the components of each dimension were modified. Life expectancy at birth (dimension of
health), tertiary educated people and lifelong learning (dimension of education) and GDP
per capita in PPS (dimension of living standards) have been chosen as indicators of
human development. These components were then used in a hierarchy cluster analysis in
the Ward method. Three clusters were created with different levels of development
potential (from below-average potential to above average one). Initially, a research
hypothesis that there was a dynamization of human development processes in most
regions has been set. Namely, it was assumed that more than half of monitored regions in
the lower group of potential to human development would shift to the higher group. This
hypothesis was not confirmed and it was found that a vast majority of the regions have
not changed their positions in the cluster in the monitored period.
Keywords: cluster analysis; GDP per capita; human development; life expectancy at
birth; lifelong education; NUTS II regions; tertiary education; Visegrad Group Plus.
Economics 111
Introduction
The most widely used indicator for measuring the state of the economy is the GDP
(Stiglitz, Sen & Fitoussi, 2009; Van den Bergh, 2009), although it does not include
social, political, cultural and environmental aspects of development. Many alternatives
can be applied for measurement of socio-economic development, the best known and
most often used is an index called the Human Development Index (HDI) as Todaro and
Smith (2011) demonstrated. The index that has been used by the United Nations since
1990 brings a different perspective on development issues. It should be better able to
emphasize the effect of other than just monetary (economic) factors of the economy of
a country. The basis of the HDI index is a greater explanatory power, which is to follow
economic development or sustainable development in general. The measurement of
human development through the HDI is an alternative to the GDP/GNI per capita as a
measure of human well-being.
Basu and Basu (2005) consider HDIs as primarily nation level indicators, estimated for
the country as a whole. The constructions of the HDI do not express the differences in
regions of countries. However, the regional disparities exist and influence the regional
development. Based on it, we decided to analyze the issue of human development for a
group of countries of the Visegrad Group Plus (hereafter V4+) at the NUTS II level. This
group includes the Visegrad Group countries (Czech Republic, Hungary, Poland and
Slovakia), Slovenia and Austria, which were included in this group on the ground of the
Regional Partnership Agreement from 2001. There are 46 regions on the NUTS II level
– eight in the Czech Republic, seven in Hungary, sixteen in Poland, nine in Austria, four
in Slovakia and two in Slovenia. The research was made in the period from 2004 (the
beginning of membership of most countries V4+) to 2013 (last available data). In the
selection of indicators, the same approach as by the HDI was adopted; however, the
components of each dimension were modified. Life expectancy at birth (dimension of
health), tertiary educated people and lifelong learning (dimension of education) and
GDP per capita in PPS (dimension of living standards) have been chosen as indicators
of human development at regional level. These components were then used in a
hierarchy cluster analysis in the Ward method.
Three created clusters include a plurality of regions based on their inner similarities
that would not otherwise be apparent at first glance. These clusters include the regions
with different levels of development potential – first cluster with above-average
potential for human development, second cluster with average potential for human
development and third cluster with under-average potential for human development.
Initially, a research hypothesis that there was a dynamization of human development
processes in most regions has been set. Namely, it was assumed that more than half of
monitored regions in the lower group of potential to human development would shift
to the higher group. This hypothesis was not confirmed and it was found that the vast
majority of the regions have not changed their positions in the cluster in the monitored
period.
112 Strategica 2016
Modified Human Development Index
The beginning of the Human Development Index dates back to 1990 when the UN
Development Programme (UNDP) published the first report on human development
(Human Development Report) which established the need for human development
measurement. Human development has two forms, which should be in balance, the
formation of human capabilities in terms of improving health, increasing knowledge
and skills to meet human need and their own skills and competencies, free time, job
security, cultural, social and political events. Basically, human development is clearly
and directly dependent on income. It is, therefore, necessary to examine other
variables that point out the potential of a country much better as well as the options
currently appear in human development (Majerova, 2012).
Data of Human Development Index
The Human Development Index (HDI) is a summary measure of achievements in key
dimensions of human development: a long and healthy life, an access to knowledge and
a decent standard of living as has been shown in UNDP (2015).
These three dimensions have four parts - health and standard of living have one part
each and education has two parts:
- health dimension – life expectancy at birth (interval 20-85 years)
- education dimension – expected year of schooling (0-18 years) and mean years of
schooling (0-15 years)
- the standard of living dimension – GNI per capita in USD/PPP (100-75.000).
Because of the need to improve their explanatory power, the calculation method of two
of three dimensions (health indicator index is the only one that has remained
unchanged) has changed over time; last change was made in 2010. The literacy rate of
population has been replaced by an indicator of expected years of schooling, the
combined gross enrolment by the mean number of years of education (knowledge
dimension). The dimensions of living standards are now measured by GNI per capita in
purchasing power parity to the USD. “The main change was to switch from the original
additive aggregation function (the arithmetic mean of the three components) to a
multiplicative function (their geometric mean)” (Ravallion, 2012, p.208) as shown in
Equation (1).
HDI 3 I n LE I n E I n GDP
(1)
HDI index calculation required the values in the range from zero (the lowest level of
human development) to one (the highest human development), and therefore they
were determined for each dimension of the minimum and maximum values (Anand &
Sen, 1994) based on historical evidence.
Economics 113
NUTS Human Development Index
For the purpose of the paper, we adopted the same principle of HDI creating at the
national level – the health dimension, knowledge dimension and dimension of a living
standard. Components of each dimension, however, had to be modified because of the
lack of data at the regional level (NUTS II level).
Data were used from a regional database of Eurostat and converted to the number of
inhabitants representing the given group.
The construction of the HDI of V4 regions (NHDI) was as follows:
- Health with the value of life expectancy at birth that represents, according to
Eurostat, the mean number of years that a newborn child can expect to live if subjected
throughout his life, to the current mortality conditions (age-specific probabilities of
dying).
- Knowledge, which includes two components:
1. Tertiary educated people in the age of 25-64, where the indicator is defined as a
percentage of the population aged 25-64 who have successfully completed tertiary
studies (e.g. university, higher technical institution, etc.). This educational attainment
refers to ISCED (International Standard Classification of Education) 1997 level 5-6,
that includes the first stage of tertiary education (bachelor and master or equivalent)
and second stage of tertiary education (doctoral or equivalent).
2. Lifelong learning in the form of the participation rate in education and training
covers participation in formal and non-formal education and training. The reference
period for the participation in education and training is at least four weeks.
Participation rates in education and training for the age group of 25-64 are presented.
The data are calculated as annual averages of quarterly EU Labour Force Survey data
(EU-LFS).
- Standard of living, measured by GDP per capita in PPS – Purchasing Power Standards
(PPS), is a common currency that eliminates the differences in price levels between
countries and regions allowing meaningful volume comparisons of GDP between them.
These indicators were chosen for their greatest explanatory power in relation to
human development. The life expectancy at birth reflects the level of health and quality
of life and measures the qualitative aspects of living a healthy life. It correlates
positively with human development – the higher the healthy life expectancy of the
region, the more developed it is.
The share of tertiary educated people in productive age on the population in this age
group is connected with the ability of people to reflect the needs of knowledge of the
economy and to contribute to it and human development. Lifelong learning, in the form
of participation in education and training, encompasses all learning activities
undertaken throughout life (after the end of initial education) with the aim of
improving knowledge, skills and competences, within personal, civic, social or
employment-related perspectives as Eurostat (2015) demonstrates. Due to lifelong
learning people extend their possibilities for increasing their incomes. As a dimension
of health, both indicators of education are positively correlated with human
development.
114 Strategica 2016
The last but not least dimension is the GDP per capita. The implementation of this
indicator was influenced by the opinion of Sen (1999) who considered the income
(product) as a primarily mean to achieve human development. The GDP per capita
reflects the economic level better than its absolute value. The indicator is measured by
an artificial European currency unit, the purchasing power standard (PPS).
The values of the index and its sub-indexes in every NUTS II region of V4+ are shown
as an example of the year 2013 in Table 1.
Table 1. Components of index NHDI and the values of NHDI in 2013
Stat. name Region LEB TE LL GDP/c NHDI
CZ01 Praha 80.1 38.4 8.7 46,000 0.630
CZ02 Střední Cechy 78.2 19.9 9.1 19,500 0.357
CZ03 Jihozápad 78.4 18.0 10.5 19,400 0.361
CZ04 Severozápad 76.4 12.5 8.0 16,500 0.224
CZ05 Severovýchod 78.6 16.8 13.2 18,000 0.370
CZ06 Jihovýchod 79.1 22.6 9.2 20,600 0.407
CZ07 Střední Morava 78.1 16.2 7.8 17,700 0.305
CZ08 Moravskoslezsko 77.1 17.6 10.7 18,400 0.313
HU10 Közép-Magyarország 77 33.2 4.2 28,700 0.397
HU21 Közép-Dunántúl 75.5 19.0 2.0 15,600 0.178
HU22 Nyugat-Dunántúl 76.1 17.8 1.8 17,900 0.200
HU23 Dél-Dunántúl 75.2 18.3 2.6 11,900 0.140
HU31 Észak-Magyarország 74.2 16.7 2.1 10,500 0.051
HU32 Észak-Alföld 75.4 17.8 3.4 11,300 0.144
HU33 Dél-Alföld 75.6 18.2 2.5 11,900 0.154
PL11 Lódzkie 75.4 23.5 3.1 16,700 0.211
PL12 Mazowieckie 77.7 35.4 6.7 28,500 0.453
PL21 Malopolskie 78.5 26.6 4.7 15,800 0.342
PL22 Slaskie 76.3 24.4 4.5 18,600 0.278
PL31 Lubelskie 77.1 25.5 4.9 12,600 0.261
PL32 Podkarpackie 78.6 23.1 2.6 12,700 0.270
PL33 Swietokrzyskie 77.1 26.0 3.1 13,100 0.259
PL34 Podlaskie 77.1 26.1 3.7 13,000 0.279
PL41 Wielkopolskie 77.2 23.4 3.7 19,300 0.303
PL42 Zachodniopomorskie 76.7 23.9 3.2 15,100 0.257
PL43 Lubuskie 76.3 20.6 2.8 15,000 0.221
PL51 Dolnoslaskie 76.9 25.1 4.1 20,100 0.311
PL52 Opolskie 77.2 20.9 3.1 14,500 0.248
PL61 Kujawsko-Pomorskie 76.9 20.7 3.9 14,800 0.247
Economics 115
PL62 Warminsko-Mazurskie 76.3 20.7 2.8 12,900 0.203
PL63 Pomorskie 77.9 26.7 5.8 17,300 0.347
AT11 Burgenland (AT) 81.1 15.8 10.1 23,300 0.428
AT12 Niederösterreich 81 17.6 12.0 27,900 0.484
AT13 Wien 80.1 30.6 19.0 42,300 0.648
AT21 Kärnten 81.7 17.3 13.0 28,400 0.510
AT22 Steiermark 81.8 17.5 13.1 30,700 0.525
AT31 Oberösterreich 81.4 17.2 12.7 34,500 0.524
AT32 Salzburg 82.2 21.8 13.0 40,200 0.601
AT33 Tirol 82.4 19.1 13.4 35,800 0.575
AT34 Vorarlberg 82.3 19.0 14.5 35,600 0.582
SK01 Bratislavský kraj 78.1 37.5 7.1 49,000 0.541
SK02 Západné Slovensko 76.8 16.6 2.6 18,800 0.224
SK03 Stredné Slovensko 76.2 18.8 2.5 15,900 0.208
SK04 Východné Slovensko 76.2 17.5 1.9 13,800 0.179
SI01 Vzhodna Slovenija 79.5 23.5 10.9 18,100 0.333
SI02 Zahodna Slovenija 81.7 32.9 14.0 25,900 0.551
Note: LE in the years, TE and LL in the thousands of inhabitants, GDP/c in PPS
As mentioned, we accepted the values of the HDI that range in the interval of 0-1 and
formed the categories of NHDI as follows:
- very high human development, with the value of 0.800 and above
- high human development, in the interval of 0.700–0.799
- medium human development, in the interval of 0.550–0.699
- low human development, below 0.550.
The results of the level of human development are interesting. If we analyze the NHDI
in terms of categorization, the regions reached low levels of the NHDI (below 0.550),
with some exceptions related to the regions with capitals (except Poland and Hungary)
and certain regions in Austria. The medium human development amounted regions, in
which the capital city is situated, and some Austrian regions such as Salzburg, Tyrol,
and Voralberg mainly due to the high value of the GDP index.
If we focus on the evolution of the NHDI in individual economies, we find out that the
value of this index is similar in all regions of Austria - between the best and the worst
value of the indices there is a difference of 34%, while in Hungary the difference
between the best and the worst result is 87 percent! It is caused by a very low value of
the NHDI in the Észek-Magyarország region (0.051) where the life expectation at birth
component is approaching the minimum values.
116 Strategica 2016
Methodology of cluster analysis
Cluster analysis is primarily focused on the search for similarities or differences
between examined objects. „Cluster analysis provides one, empirically based, means
for explicitly classifying objects” (Punj & Stewart, 1983, p.134). If the research object is
the region, as in our case, it is clear that only by applications of cluster analysis, we can
confirm our assumption about the most or the least developed regions in the area of
human development and its modifications.
Blashfield and Aldenderfer (1988, p.447) consider that „cluster analysis method has a
long history – the earliest known procedures were suggested by anthropologists, later
this ideas were picked up in psychology“. Clustering analysis became one of the
qualifying methods in the 20th century, the usefulness of which immediately had an
impact on practically all fields of science. Tryon (1939) created the first
comprehensive work dealing with cluster analysis in 1939. The main motivation for
the use of clustering is uncovering of hidden similarities or differences. For this reason,
a cluster analysis is now widely used by all scientific disciplines (for us is most
interesting use in the field of economy, see e.g. Halásková & Halásková, 2015).
If we want to formulate the principle of cluster analysis mathematically, it can be
stated that it is the decomposition of set S(k) by the objects to k certain groups of
clusters C, see Equation (2):
S ( k ) C1 , C 2 , C 3 ,..., C k
(2)
where C i 0 .
The basis of cluster analysis is sorting (for details see Meloun, 1994), of which we
appoint two basic approaches. The first is called hierarchy cluster method and is most
widely used by the software. It is based on the use of once formed clusters. Thus,
formed clusters are then used to create other clusters from the rest of the data file.
This manner is then preceded until all elements of the data file are a part of the cluster.
This procedure has been chosen for our analysis of the regional level of human
development in the V4+ countries.
The second method is a non-hierarchy cluster approach, which is based on cluster
search on the principle of the smallest difference from the average. The procedure,
however, is advantageous only if the number of clusters we want to achieve, is
determined beforehand. However, this may become a significant limitation in a further
research, because only such a number of clusters are finally formed, which we
determined beforehand and for example, some extreme values may merge with
average ones (K-means).
The selection of cluster methods is necessary after determining the clustering process.
There are seven methods (Caliński & Harabasza, 1974). The first two methods are
based on the Between Groups Linkage or Within Groups Linkage. Their use depends on
good knowledge of the data file and information about the number of clusters that we
want to achieve. In the case of ignorance of the total number of clusters we want to
achieve, both methods are limitations in further research. The third method, Nearest
Economics 117
Neighbour is based on the shortest distance between clusters. The fourth method,
Furthest Neighbour method, searches the values in the data file that are furthest apart.
The fifth method, Centroid Clustering method, may look at first glance like the most
ideal. It is based on the Euclidean distance between the centroids of clusters. The
closest are those clusters that have the smallest distance between the centroids.
However, it does not solve the differences that may occur due to different weights for
equally large clusters. The sixth method - Median clustering - solves the problem of
weights variance that the previous method gives to differently large clusters.
The last method, the Ward method, focuses on the allocation of profiles to groups
equally. This method can be represented graphically, similarly to the previous
methods, see Figure 1. The principle of the method is not optimization, but
minimization of heterogeneity. The purpose is to find the greatest similarity. In
measuring the human development and its modifications, it is necessary to look for
similarities among the 46 regions using this method.
Figure 1. Ward Method in Cluster Analysis
Since the values of each variable were in different units (years, population, monetary
unit), it was necessary to standardize data. This standardization was carried out in two
steps:
_
s
1. firstly, the medium value z k and standard deviation k were calculated according to
Equation (3) and (4)
_
1 n
zk z jk
n k 1
(3)
1
1 n _
2 2
s k z jk z k
n k 1
(4)
2. afterwards the standardization through normalization of each object in the z-score
was made (the standardization z-function) by the following Equation (5)
_
z jk z k
xik
sk
(5)
One of the fundamental problems of clustering analysis is the concept of mutual
similarity of objects and quantitative expression of this similarity. One of the most
118 Strategica 2016
common ways of expressing relationships among objects is the metrics. The metric
squared Euclidean distance (SED) was used for Ward's method (6):
n
d ( xi , x j ) ( xik x jk ) 2
2
e
k 1
(6)
where d2 is SED, xik is the value of k-symbol for the i observation of the variable and n is
the total number of objects.
Application of cluster analysis in NUTS II Regions of V4+
Based on the methodology described in the previous section of this paper, cluster
analysis will now be practically applied to the regions at NUTS II level of the Visegrad
Group Plus countries. The V4+ regions will be divided according to their development
potential in terms of human development.
As already mentioned, the hierarchy cluster approach by means of Ward's method was
used for the classification of regions, and all performed calculations were performed
by using SPSS software. Ward's method not based on the optimization of distances
between clusters, but on optimization of the clusters´ homogeneity according to some
criterion, which is the minimizing of increase in the error sums of squares of
deviations from the points of the cluster centroid. The sum of squares is calculated for
each possible pair of connection aggregates at each stage of this analysis. Then those
clusters are combined where there is a minimal increase in the error sum of squares.
The advantage of using this method and also our motivation of its use is the tendency
to remove small clusters, thus forming clusters of about the same size, which is often
welcome feature. This is because this method requires expression of objects´ distance
by the squared Euclidean distance. Since the Ward's method leads to minimization of
intra-cluster dispersion, causing research that is more accurate examined objects, its
choice was for our purposes the best option.
The subjects of cluster analysis are 46 NUTS II regions that have been evaluated by
following metrics:
- cluster 1 is the group of regions with above-average potential for development in
terms of human development and its input parameters;
- cluster 2 indicates the group of regions with average development potential in terms
of human development and its input parameters;
- cluster 3 indicates the group of regions with below-average development potential in
terms of human development indicators and its input.
Table 2 shows how various inputs influencing the final value of human development
during the reporting period have changed. Some of the clusters remained unchanged
throughout the monitored period, on the contrary, some of them evolved over time.
From this table, we derive whether developments in the regions when analyzing the
input variables are rather constant or whether the processes lead to dynamization in
regions.
Economics 119
Table 2. Created and changed clusters of V4 + regions taking into account the four inputs
between the years 2004-2013
NUTS 2 Cluster (period) NUTS 2 Cluster (period)
SK01 cluster 1 PL51 cluster 3
SK02 cluster 2 PL52 cluster 2
SK03 cluster 2 PL61 cluster 2
SK04 cluster 2 PL62 cluster 2
cluster 1 2004 – 2009 cluster 2
CZ01 PL63
2010 – 2013 cluster 3
2004-2010 cluster 2 cluster 1
CZ02 HU10
2011-2013 cluster 1
2004-2010 cluster 2 cluster 2
CZ03 HU21
2011-2013 cluster 1
CZ04 cluster 2 HU22 cluster 2
2004-2010 cluster 2 cluster 2
CZ05 HU23
2011-2013 cluster 1
2004-2007 cluster 2 cluster 2
CZ06 HU31
2008-2013 cluster 1
CZ07 cluster 2 HU32 cluster 2
CZ08 cluster 2 HU33 cluster 2
PL11 cluster 3 AT11 cluster 1
PL12 cluster 1 AT12 cluster 1
PL21 cluster 3 AT13 cluster 1
PL22 cluster 3 AT21 cluster 1
PL31 cluster 3 AT22 cluster 1
PL32 cluster 2 AT31 cluster 1
PL33 cluster 2 AT32 cluster 1
PL34 cluster 2 AT33 cluster 1
PL41 cluster 1 AT34 cluster 1
cluster 2 SI01 2004-2007 cluster 2
PL42
2008-2013 cluster 1
PL43 cluster 2 SI02 cluster 1
Note: The change in the development of the region in the years 2004-2013 is indicated.
Conclusions
The Human Development Index is one of the indicators, which can measure the
socioeconomic development. This indicator has been used since 1990, it measures the
abovementioned development at the national level and it is used to compare
differences between economies. However, there are not only disparities between
economies but also within them. For this reason, we decided to construct the modified
Human Development Index (NHDI) and for this purpose, countries of the Visegrad
Group Plus at the NUTS II level have been selected. This group includes the Visegrad
Group countries (Czech Republic, Hungary, Poland and Slovakia), Slovenia and Austria
and there are the 46 NUTS II regions. For our purpose, the data had to be modified, but
the methodology of the NHDI was the same as for the HDI. We used three components -
the health dimension (life expectancy at birth), the knowledge dimension (tertiary
educated people and participation rate in education and training) and the dimension of
living standard (GDP per capita).
120 Strategica 2016
These components were then used in hierarchy cluster analysis in the Ward´s method
in the period from 2004 to 2013. The three clusters were created. These clusters
included a plurality of regions based on their inner similarities that would not
otherwise be apparent at first glance. At the beginning of the monitored period, the
situation in various regions was as follows: Regions of Austria were very homogeneous
and placed in a group with above-average potential for development (group 1).
Hungarian regions (except a region in which the capital is) were in the second group –
with average development potential. Czech regions were placed in the first two groups
(1 and 2) and Polish regions exhibited the lowest homogeneity and were placed in all
groups (most in group 2). There was initially set the research hypothesis that more
than half of monitored regions in the lower group of potential to human development
will shift to the higher group (1 or 2).
Finally, it is also necessary to note that in some regions the time offset between the
individual clusters is quite obvious. Generally, it was a situation where regions have
shifted from average to above-average potential towards of development, i.e. from
cluster 2 to cluster 1. It was the case of regions in the Czech Republic – Střední Čechy
(CZ02), Jihozápad (CZ03), Severovýchod (CZ05), Jihovýchod (CZ06) and Slovenia –
Vzhodna Slovenia (SI01). There was, however, the reverse process, which led to some
slowdown in the development potential of the region. The shift from the group of
average to below average happened only in one region, the region of Poland –
Pomorskie (PL63). However, the vast majority (exactly forty of forty-six) of the
examined regions did not change their position in the cluster during the reporting
period. Our hypothesis about dynamization of most regions was not confirmed.
It should be emphasized that the resulting allocation of regions into individual clusters
was dependent on the number of input variables. If we reduced the number of input
variables or added more input variables correlating with a modified human
development, the resulting allocations of regions would change, the question remains
whether significantly or only slightly.
In our future research, we would like to create the modified Human Development
Index (from the variables of human development used in this paper) at the regional
level and focus on the comparison of cluster analysis´ results with the results of this
index in the monitored period.
Acknowledgements. This work was supported by the Ministry of Education,
Youth and Sports of the Czech Republic within the Institutional Support for
Long-term Development of a Research Organization in 2016.
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122 Strategica 2016
EMPLOYMENT PROSPECTS FOR MANUFACTURING AND SERVICE
ENTERPRISES IN THE EUROPEAN UNION
Inese MAVLUTOVA
BA School of Business and Finance
161 K. Valdemara St., Riga, LV-1013, Latvia
inese.mavlutova@ba.lv
Grigory OLEVSKY
University of Latvia
19 Raina Blvd., Riga, LV-1586, Latvia
grigol@lanet.lv
Kristaps LESINSKIS
BA School of Business and Finance
161 K. Valdemara St., Riga, LV-1013, Latvia
kristaps.lesinskis@ba.lv
Abstract. Analysis implemented in the article allows concluding that the high-tech
manufacturing industries do not play a significant role in solving the problems of
employment. They are capable for only partial compensation for the loss of jobs in labor-
intensive sectors of the economy. Accumulation of knowledge of the population in
industrialized countries together with high levels of computer literacy contributes to the
revitalization of business services sellers. The authors proceed from the assumption that
service sector, and business services in particular, to a certain extent are capable of
absorbing of the workforce. This article argues that employment in the service sector in
the European Union is still largely focused on traditional sectors of activity. The purpose
of the paper is to investigate latest trends of employment in the world and the European
Union and the role of the service sector in balancing labor market. Knowledge-intensive
services that are important from the point of view of economic dynamics, only start to
concur positions in the EU single market.
Keywords: employment; manufacturing; knowledge-intensive business services; small
and medium enterprises.
Introduction
Employment is considered one of the most important economic indicators when
analyzing the country’s economic prospects. Aging of the population, deteriorating
birth rates and growing mortality rates are common in most parts of the European
Union. Recently another wave of immigration from developing countries of Western
Asia and North Africa has occurred and will continue. As a result, European Union is
facing labor deficit and structural problems in labor market in coming years.
In 2010, the European Union approved document called “Europe 2020” which was the
EU's growth strategy for the coming decade. The strategy contains five targets, one of
them being employment, and aims at 75% of the 20-64 year-olds to be employed by
Economics 123
2020. Striving for inclusive growth the strategy contains flagship initiative “An Agenda
for New Skills and Jobs” that calls for modernizing labor markets by facilitating labor
mobility and the development of skills throughout the lifecycle with a view to
increasing labor participation and better matching labor supply and demand.
The balance between labor supply and demand on the labor market is achieved not
only through employers and employees consensus but also through thoroughly
sustainable employment policy developed by the government. The article aims to
investigate the latest global employment trends and service sector contribution to
labor market development.
Qualitative methods are used for theoretical overview and analysis of labor economy
and employment. Personal observations of the authors are used to reveal the problems
in the current labor market and employment situation in the EU. Quantitative research
methods: statistical data analysis, forecasting and other financial calculations are used
to analyses trends and structural problems in labor markets. Authors provide several
recommendations on possible incentives to stabilize and develop labor markets in the
European Union.
Theoretical aspects of employment
The complex of relationships, most adequately characterizing the principles, the
content and form of participation of the working population in production, in science,
is identified with employment as the economic category. The Economic dimension of
employment is mainly the labor market.
Encyclopedia Britannica (2016) defines “Labor economics, study of the labor force as
an element in the process of production. The labor force comprises all those who work
for gain, whether as employees, employers, or as self-employed, and it includes the
unemployed who are seeking work”. Labor economics includes the factors affecting
the efficiency of the workers, their deployment between different industries and
occupations, modern labor economics especially deals with the labor force of
contemporary industrialized economies.
Theory of economics emphasizes the importance of labor productivity as one of the
core indicators of efficiency of the labor market and economy in general. In the
European Union labor productivity per hour worked is calculated as real output
(deflated GDP measured in chain-linked volumes, the reference year 2010) per unit of
labor input (measured by the total number of hours worked). Measuring labor
productivity per hour worked provides a better picture of productivity developments
in the economy than labor productivity per person employed, as it eliminates
differences in the full time/part time composition of the workforce across countries
and years (Eurostat, 2016). Labor productivity depends on such factors as an
investment and saving in physical capital, new technologies, and human capital.
Demography, urbanization, globalization, technology, and macroeconomic crises bring,
as the World Bank experts (World Bank, 2013) believe, about formidable jobs
challenges. Countries that fail to address them may fall into vicious circles of slow
growth in labor earnings and job-related dissatisfaction affecting a sizable portion of
124 Strategica 2016
the labor force. Youth unemployment and idleness may be high, and women may have
fewer job opportunities, leaving potential economic and social gains untapped. A
repeating pattern of small gains in living standards, slow productivity growth, and
eroding social cohesion can set in. In contrast, countries that address these jobs
challenges can develop virtuous circles. The results—prosperous populations, a
growing middle class, increased productivity, and improved opportunities for women
and youth—may then be self-reinforcing.
Employment is the result of equilibrium determined by labor market: a working-age
population that has been able to carry out activities that can generate income in the
form of wages or profits. Sloman and Hinde (2007) refer to a Keynesian theory in
which it is assumed that there is a maximum level of GDP that can be obtained at any
one time, and if equilibrium GDP is at this level, there will be no deficiency of aggregate
demand and hence no disequilibrium unemployment. Employment is one of the most
important factors of economic growth (traditional, approved by the practice of
management in the period of domination of automatic production and occupying its
rightful place in all economic growth models). Therefore, the risk of a slowdown in
productivity because of the unsolved problems of employment is taken as a threat
signal of economic slowdown. To reduce the risk of a slowdown, it is necessary to
improve the use of available labor force and to accelerate structural reforms in the
economy.
Employment is multifaceted socio-economic phenomenon having a content, form,
structure, and organization. Therefore, authors of the article limit their research of
employment to the framework of normative perception about employees and
employers:
- Employees, who get a basic remuneration not directly dependent the revenue of the
employer.
- Employers, who hold self-employment jobs (i.e. whose remuneration depends
directly on the (expectation of) profits derived from the goods and services produced)
and engage one or more person to work for them as ‘employees’, on a continuous basis
(International Labour Organization, 1993).
A characteristic feature of modern understanding of employment is the uncertainty of
the status of employee and employer. In other words, a person may be an employer
and employee at the same time or may regularly switch from the status of self-
employed to employee and vice versa. In addition, there is a myriad of options how a
person may simultaneously represent himself in the status of employer and employee.
The choice of status, in this case, is largely determined by the level of motivation of
individual who must decide on its own employment dilemma:
- Guided by information about supply and demand in the labor market and based on its
own view on the prospects of the functioning of given industry - to choose the
employee status.
- Assessing its own intellectual capital, social networks, financial possibilities, the level
of the market competition, business risks etc. - to try out his own business.
By signing a contract of employment with an employer, individual expresses his
readiness to work for certain material rewards that depend on the results of his work.
Economics 125
The literature presents quite a number of approaches to the justification of the reasons
for qualitative changes in employment. Thus, Мanuel Castells (2009), considering the
economic development of industrialized countries, has formulated factors determining
the nature and dynamics of employment evolution. From the standpoint of the subject
of this research, the most interesting are the following trends (Castells, 2007):
- the phasing out of agricultural employment;
- the steady decline of traditional manufacturing employment;
- the rise of both producer services and social services, with the emphasis on business
services in the first category, and health services in the second group;
- the increasing diversification of service activities as sources of jobs;
- the rapid rise of managerial, professional, and technical jobs;
- the formation of a "white-collar" proletariat, made up of clerical and sales workers;
- the relative stability of a substantial share of employment in retail trade;
- the simultaneous increase of the upper and lower levels of the occupational structure;
- the relative upgrading of the occupational structure over time, with an increasing
share of those occupations that require higher skills and advanced education
proportionally higher than the increase of the lower-level categories.
Labor economics covers a range of issues related to the market of wage labor and that
are fundamental to understand how the world of work is connected to wage formation,
employment and economic growth, the importance of demographic issues, human
capital, and labor market regulations. These topics have been described and analyzed
thoroughly in academic literature, providing for extensive debates on a number of
issues, including the impact of labor market institutions, such as minimum wages and
employment protection legislation, trade unions and employers’ organizations
(International Labour Office, 2013).
The decline in manufacturing employment in the industrialized world is not a new
phenomenon and there is a raft of potential explanations ranging from productivity to
globalization. Therefore, Rowthorn and Ramaswamy (1999) argue that
deindustrialization is explained by developments that are internal to an advanced
economy stimulated primarily by faster growth in manufacturing productivity, which,
in turn, leads to relative price changes and shifts in the structure of the economy. An
alternate hypothesis is that the manufacturing employment decline is primarily due to
globalization and the rise of manufacturing in developing economies. Several recent
contributions relate the decline of manufacturing employment to episodes of
globalization and in particular the rise of China in the global economy. Pierce and
Schott (2012) document the “swift decline” of US manufacturing after China’s entry
into WTO and link the decline to changes in US trade policy that eliminated the threat
of tariff hikes.
Baumol (1967) identified the key theoretical foundation for the expansion of service
sector employment - the slower productivity growth in services compared to
manufacturing. According to what became later known as “Baumol’s disease”, the
expansion of the employment share in services relative to industry is the direct
consequence of services’ lower productivity performance (Baumol, 2001).
Accumulated volume and quality of knowledge by the population of industrialized
countries coupled with the relatively high level of computer literacy has contributed to
the revitalization of the business services vendors. Internet technologies have pushed
126 Strategica 2016
the boundaries of business making it attractive to almost every educated person. The
result is that economists and lawyers, engineers and programmers have rushed into
providing services. SMEs today not only demonstrate the strong sales growth, but also
the ability to create and use innovations. That is why the giving rationale to providing
favorable conditions for fast growing SMEs based on sales of services has become an
actual problem of modern economic science.
Manufacturing as an engine of economic growth
Modern industrial entrepreneurs are not active players in the labor market. The main
reason for that is a significant decrease in the prevalence of textile, clothing, and
footwear producing enterprises in industrialized countries. Moving labor-intensive
industrial production to Southeast Asia has strengthened the position of shadow
economy built on informal employment, i.e. on the use of statistically unregistered
labor that is not subject to taxation. The total number of employees in manufacturing
enterprises, according to United Nations Industrial Development Organization (United
Nations Industrial Development Organization, 2013), accounted for 388 million
persons worldwide in 2009, of which 200.3 million officially registered.
Formal and informal components of labor demand and supply create difficulties to
assess the actual size of employment in the manufacturing industry. Due to this, it is
reasonable to carry out analysis of the dynamics and structure of the employment in
the manufacturing industry based on sufficiently reliable statistical information on
informal employment. Thus, the number of people employed in the manufacturing
industry in the world has increased by 43.4% in 2010 compared to 1970 (see Table 1).
Table 1. Structure and dynamics of formal employment in the world manufacturing
industry, as a percentage (United Nations Industrial Development Organization, 2013, p.41)
Ranking , The share of employment in the world Growth
2010 Country 1970 1990 2010 rate, 2010
1970
1 China 10.13 23.53 34.34 484.5
2 United States 13.03 9.71 6.36 69.8
3 India 3.40 3.98 5.88 251.1
4 Russian (USSR) 19.41 16.83 3.90 …..
5 Brazil 1.48 2.32 3.84 366.7
6 Japan 7.79 6.2 3.63 67.0
7 Germany (FRG) 5.87 3.95 3.10 …..
8 Bangladesh 0.15 0.57 2.53 2550.0
9 Viet Nam 0.03 0.12 2.20 …..
10 Indonesia 0.35 1.47 2.11 840.0
number of employees in the
world (millions of people) 139.7 180.3 200.3 14
3.4
The resulting vector of formal employment dynamics in the global manufacturing
industry for the period 1970-2010 was formed based on two divergent trends - the
growth and decline:
- more than a three-fold increase occurred in Southeast Asia, the Pacific, South Asia,
Latin America, and the Caribbean;
Economics 127
- the decline occurred in the industrialized countries of Europe- by 77.5%, and in North
America- by 70% (United Nations Industrial Development Organization, 2013).
Top rated in 2010 became „world factory” – China: 34.34% of all employees in the
global manufacturing industry were inhabitants of China. However, it is interesting to
note the fact that the US became second in that rating. This happened despite the fact
that from 1970 until 2010 the employment in the US manufacturing industry
decreased by 30.2%. The only representative of Europe in the top ten in 2010 was
Germany, occupying the seventh position. The manufacturers of Germany, whose
economy is considered the "locomotive" of EU, make a worthy contribution to the
economic growth of the country. In 2012, the share of processing industry was 22.4%
of gross domestic product in Germany. For comparison, the value of this indicator on
the average in EU-27 was 15.2%, in Finland 10%, United Kingdom 10.3%, Italy 15.6%
(European Commission, 2014).
Therefore, it can be argued that Germany’s way of overcoming from the engine to the
high-tech manufacturing is fairly painless. The successes of German manufacturers are
predetermined:
- firstly, because of the fact that the leading subsectors of the manufacturing industry
in Germany is dominated by multinational corporations (Siemens AG, Volkswagen,
BASF AG, Deutsche Telekom AG, Leica Microsystems). Huge investment by
corporations in the development and implementation of innovation is an effective tool
for the formation of high-tech manufacturing.
- secondly, because of the officials forming the industrial policy on the federal and state
levels, and actively lobbying the interests of German manufacturers in governing
institutions of the EU.
Experts have formulated the most important preconditions to ensure a competitive
advantage for German manufacturers:
- successful operation of small and medium-sized enterprises in Germany, which
provide jobs for about 70% of the workforce of the country and produce complicated,
difficult to imitate production;
- highly skilled workforce;
- High-quality infrastructure.
Experts (Deloitte, 2013) have concluded that Germany has concentrated its efforts on
the development of new technologies and innovative capabilities.
The ability of entrepreneurs of US, Germany, Italy (11th position in rating of 2010),
France (14th position), United Kingdom (16th position) to maintain the competitiveness
of the national manufacturing industry may be proof to the fact that these countries
possess strong enough position in high-tech manufacturing and knowledge-intensive
services ensuring these activities. Authors take into account that Eurostat in the high-
tech manufacturing includes manufacturing of pharmaceuticals; manufacturing of
computer, electronic and optical products, manufacturing of machinery and
equipment; and manufacturing of aircraft. According to statistical information
provided by Eurostat, the activity of manufacturing enterprises in Germany is
characterized as following for the year 2011:
128 Strategica 2016
- the share of high-tech enterprises in the total number of manufacturing enterprises
was 4.2%, but the number of working for them - 7.1% of total employment in the
manufacturing industry of Germany;
- on average, one high-tech enterprise in manufacturing sector employed 57 workers,
while in the manufacturing industry in Germany as a whole the respective number was
34 workers;
- the largest share in high-tech manufacturing in 2011 belonged to manufacturers of
electrical machinery and optical instruments, office machinery and computers – 91.3%
of all enterprises and 62.3% of employed. It is noteworthy that the workforce in the
industry is concentrated mainly in medium and large enterprises - 81.7% (Eurostat,
2015b).
Fast growing high-tech enterprises in Germany are able to solve the employment
problem in the industry only in some cases, as evidenced by the information in Figure
1.
Figure 1. The average number of employees in one Germany manufacturing enterprise
(Eurostat, 2015a,c)
In 2012, an average number of employees in the fast growing company (88 people)
was 2.6 times higher than in the whole manufacturing industry in Germany in 2011.
However, among high-tech companies growth was observed only in the manufacturing
of electrical machinery and optical instruments, office machinery, and computers.
Moreover, fast-growing manufacturers of aircraft companies have been significantly
lagging behind in the number of employees compared to enterprises that had the
standard rates of growth.
Given information can serve as an argument in support of the conclusions of UNIDO
experts (United Nations Industrial Development Organization, 2013) that industries
that are classified as high-tech, do not play a significant role in solving the employment
problems. However, they are crucial in the accumulation of capital, development of
skills and increase the level of knowledge in the economy, that is, they are crucial in the
formation of productivity growth conditions. Manufacturing industry in the developed
countries keeps the motor function of economic growth, as is the main source of
capital, knowledge, and (to some extent) jobs.
Economics 129
Service sector business and employment
The attractiveness of the service sector in the labor market is confirmed by the
employment statistics. According to experts of the International Labour Organization
(ILO), 45.1% of all employees in the world were employed in the service sector in
2013. Moreover, in the past two decades, the proportion of service sector workers in
total employment in the world increased by 10.1 percentage points. Overall, slightly
below 32% of the global labor force was employed in agriculture in 2013 - a decline of
11.7 percentage points compared with the previous two decades. Employment in the
manufacturing now accounts for about 23% of global employment at a growth rate of
only 1.6 percentage points (International Labour Organization, 2014).
In the economies of industrialized countries, the dominance of the service sector in the
labor market looks even more impressive. In the US, for example, 80.1% of all workers
in 2011 were employed in the service sector – see Figure 2.
Figure 2. Employment in the basic sectors of the economy in industrialized countries in
2011, as a percentage (European Commission, 2013, р.230).
The service sector is the determining factor in shaping the demand in the labor market
in other industrialized countries too. It should be noticed that the share of service
sector employment amounted to 71.5% in the EU-27.
A crucial role in addressing employment problems in the service sector is provided by
traditional activities - hotel services and public catering, wholesale and retail trade,
repair of motor vehicles and motorcycles, real estate activities. In other words, those
activities, which, according to European Classification of Economic Activities (NACE
Rev. 2), are not included in knowledge-intensive, services (KIS).
The division of the service sector in the traditional and knowledge-intensive is, as
rightly noted by Russian researchers, conditional in its character due to unclear
criterions for defining the meaning of “knowledge-intensive”. In statistics, this
uncertainty is reflected in the expansion of the boundaries of knowledge-intensive
services. Thus, Eurostat includes transport services and education, postal services and
health care, science and financial activities (Eurostat, 2015e). However, statistics, even
130 Strategica 2016
with such expanded approach, do not indicate that knowledge-intensive services
currently play a decisive role in shaping labor supply in EU. Even in Germany, United
Kingdom, France, Spain, and Italy – countries that employed 65.8% of those employed
in the service sector in the EU in 2011, the proportion of workers representing
knowledge-intensive services, according to Eurostat classification, did not exceed half
of the employed in the economy of EU-27 - see Table 2.
Table 2. Employment in the service sector in 2011, as percentage of employment in the
economy of the EU-27 (Eurostat, 2015d)
Services Knowledge-intensive High-technology
generally services knowledge-intensive
services
Germany 70.2 40.2 2.7
Spain 74.5 35.6 2.9
France 74.7 44.5 3.0
Italy 67.8 33.8 2.3
United Kingdom 79.6 48.5 3.4
ЕU-27 65.4 36.7 3.9
As can be seen in Table 2, in the UK, where the vast majority (79.6%) of the working
population were employed in the service sector, less than a half (48.5%) of workers
were employed in the knowledge-intensive service sector. In the economic areas as
information, communications and computer services, as well as scientific research,
that is, in those industries that are included in the high-technology knowledge-
intensive services, there were occupied only 3.4% of the UK workers in 2011. In the
other leading EU countries, the value of given indicator was even smaller.
The data presented in Table 2 shows that employment in the service sector is still
largely focused on traditional areas of activity. Knowledge-intensive services are only
starting to conquer positions in the EU single market. One of the reasons for such a
slow formation of so important sector for the modern industrialized country, which
uses skilled labor, is a permissive attitude of politicians, scientists and civil society of
EU Member States to the business in the markets of knowledge-intensive services.
Business in the area of knowledge-intensive services is classified by researchers and
statisticians as knowledge-intensive business services – KIBS. The OECD includes in
the KIBS the following services: IT-consulting; R&D services; legal; accounting;
marketing and advertising; business consulting; human resource development (OECD,
2007).
However, it should be noted that the statisticians of the EU and the US have not
reached a consensus on the issue of the structure of knowledge-intensive business
services. Therefore, cross-country comparisons of the extent and dynamics of this
phenomenon require a certain correction.
The largest share (32%) of knowledge-intensive business services (market, financial
and ICT) belonged to the US in 2012. EU was the second biggest (23%) provider of
knowledge-intensive business services. In recent years, China's share is growing
rapidly, reaching 8% of global volume in 2012, thus equaling Japan (World Bank,
2013). In the EU, knowledge-intensive business services contribute 7.6% to the total
volume of production and provide jobs for almost 15 million Europeans. What is more,
Economics 131
the sector is dominated by a few multinational corporations, even though the presence
of SMEs is quite large. The contribution of enterprises and entrepreneurs of Germany,
the UK, France and Italy is approximately ¾ of the total volume of knowledge-intensive
services in the EU (Eurostat, 2015e).
US experts, based on the analysis of information on the performance of the US
companies in 2009-2012, argue the following: (i) number of fast-growing companies in
the reporting period was relatively small (2% of the national average), but they
created more jobs than conventional enterprises; (ii) one fast- growing company in the
US created 43.3 jobs on average, while companies that do not meet the criteria for fast-
growing company- 4.5 times less; (iii) almost ⅔ (62.4%) of new jobs that have
emerged during the reporting period in the US labor market due to the growing
activity of the fast-growing enterprises, were concentrated in the following five areas:
- administration, support, and waste management – 20.7%;
- professional, scientific, and technical services – 11.5%;
- health care and social assistance – 10.7%;
- wholesale and retail trade – 10.4%;
- manufacturing – 9.1% (Clayton, Sadeghi, Spletzer & Talan, 2013 ).
The first position in contribution to accelerating the employment growth (38.0% of the
total number of surveyed companies) is held by companies with a total staff of 100 or
more employees – see Figure 3.
Figure 3. Distribution (in %) of the US high-employment-growth enterprises in 2009-2012
by the number of employees (persons) (Clayton et al., 2013, р.13).
The leadership of large enterprises can be explained by both abundance of resources
and the effective functioning of investment attraction model in the US business. It is
important to note here that the US statistics show quite a serious contribution of
enterprises employing from one to nine employees, that is, the significant role of
micro-enterprises to accelerate growth. The significant presence (50.2%) of small (10-
49 employees) and micro-enterprises among US high-employment-growth enterprises
demonstrates their ability to grow rapidly.
In this regard, the authors conclude:
- In the US, the service sector is dominated by micro-enterprises – 78% out of total in
2010, and together with small enterprises (19%) SME dominance is obvious.
132 Strategica 2016
- Despite the impressive scale of the spread of SMEs in the service sector, their role in
shaping the demand in the labor market of the country is not a determining. In SMEs
that provided services in 2010, there were working only 31.1% of those working in the
industry, but in enterprises with 250 or more employees - 52.2% (OECD, 2014).
- The US government orientation to liberal market values, including stimulating
entrepreneurship policies, is capable of creating the most favorable conditions for the
expansion of the number of entrepreneurs. However, from the standpoint of solving
the employment problems of the US economy determining factor remains large
enterprises.
The scale of involvement of the US working-age population in service sector indicates
that along with the solution to achieve equilibrium in the labor market, it is also
solving the problem of social sustainability. Sociology scientists argue that employees
in high-tech knowledge-intensive manufacturing and entrepreneurs providing
knowledge-intensive business services play a major role in stabilizing society.
Conclusions
Labor economics includes the factors affecting the efficiency of the workers, their
deplopment between different industries and occupations, modern labor economics
especially deals with the labor force of contemporary industrialized economies. The
Economic dimension of employment is mainly the labor market. In general,
employment is the result of equilibrium determined by labor market: a working-age
population that has been able to carry out activities that can generate income in the
form of wages or profits.
Accumulated amount and quality of knowledge by the population of industrialized
countries coupled with the relatively high level of computer literacy contributed to the
revitalization of the business services vendors. The knowledge-intensive business
services are the main driving factor of economic development. Development of
knowledge-intensive high-tech manufacturing is needed to solve the problems of
economic growth.
In European countries, employment in the service sector is still largely focused on
traditional areas of activity. Knowledge-intensive business services that are crucially
important for the economic development are only starting to conquer positions in the
EU single market. One of the reasons for such a slow formation of so important sector
for the modern industrialized country, which uses skilled labor, is a permissive
attitude of politicians, scientists and civil society of EU Member States to the business
in the markets of knowledge-intensive services.
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Economics 135
EMPLOYMENT OPPORTUNITIES IN THE CONTEXT OF THE GEORGIA
- EU ASSOCIATION AGREEMENT/ DCFTAS. GENDER OVERVIEW
Nugzar TODUA
Ivane Javakhishvili Tbilisi State University
3 University St., Tbilisi, Georgia
nugzar.todua@tsu.ge
Charita JASHI
Ivane Javakhishvili Tbilisi State University
3 University St., Tbilisi, Georgia
charita.jashi@tsu.ge
Tamar JANGULASHVILI
Ivane Javakhishvili Tbilisi State University
3 University St., Tbilisi, Georgia
t.jangulashvili@gmail.com
Abstract. The article analyzes transformation processes of economic reforms in Georgia
in the context of AA/ DCFTA, shows opportunities for business development in Georgia,
identifies the barriers to increasing the potentials of female and male in the economic
processes, outlines the perspectives of international trade for fostering business
development in the country. Association Agreement / (DCFTA) between Georgia and EU
fully comes into force since 1 July 2016. There are strong needs for in-depth analysis of
the impact of trade agreements on gender equality. In the modern world where women’s
role in social and economic life is continuously increasing the issues of gender equality
gains an utmost importance. Women’s economic empowerment is recognized as an
important factor for stimulating economic growth, poverty reduction and employment
opportunities in Georgia. The article emphasizes the role of women in the international
trade and perspectives in this regard. The realization of all the components of the AA/ /
(DCFTA) between Georgia and the EU in the near future should be determined by the
country’s success in abiding by the principles of market economy, social justice, and
gender equality.
Keywords: Association Agreement/DCFTA; gender equality; economic empowerment;
international trade; business.
Introduction
Georgia is a European Union neighboring country, consistently pursuing a path
towards building a democratic state and remains firmly committed to embracing
democratic and European values. Getting closer to European standards and meeting
necessary requirements for establishing relevant political and economic environment
for democratic development and social justice. One of the main priorities of the EU
Commission is to increase female labor-market participation and equality in the
economic independence of women and men, promotion of female entrepreneurship in
136 Strategica 2016
all sectors of economic development. (Strategy Engagement for Gender Equality,
2016). In 2015 started Global Goals for Sustainable Development: 17 targets to build a
better world for everyone. Goal 5 is gender equality which recognizes that women`s
economic empowerment –is critical in ending extreme poverty. Empowering women
and men to participate fully in the process of business development of the country is
crucial to building stronger economies.
Women’s economic empowerment is recognized as an important factor for stimulating
economic growth, poverty reduction and employment opportunities in Georgia.
Association Agreement opens new opportunities for Georgian women, but challenges
are very impressive. In the modern world where women’s role in social and economic
life is continuously increasing the issues of gender equality gains an utmost
importance.
The aim of this article is to analyze ongoing processes of economic reforms in Georgia
in the context of AA/ DCFTA to identify the factors that make barriers for increasing
the potential of a female in the economic processes, to outline a strategy of the
perspectives of international trade for fostering business development in the country.
The economic development of Georgia is closely connected to the new reality. Since
2005, The Government of Georgia had developed a landmark document on Georgia’s
Priorities for the European Union’s Neighborhood Policy Action Plan, through which it
has clearly defined strategic objectives for the country’s development, foreseeing
Georgia’s integration into European and Euro-Atlantic structures. The Association
Agreement with the EU and Deep and Comprehensive Free Trade Area (DCFTA) fully
comes into force since 1 July 2016. The both business and export opportunities are
obviously expanded due to the new possibilities, which are created by the Agreement.
In this regard, enhancement of women’s economic opportunities from standpoint of
labor policy and employment gains high importance for both human and economic
development. New and upcoming business regulations, which are due to be introduced
according to the Georgia’s European Integration-related reform agenda, do not set any
legislative limits for women to be engaged in economic activities. However, women
find difficult to further develop their economic potential, be employed, run a business
or start the new ones.
Gender paradigms of economic development
According to the World Bank report Georgia (WB 2016) is recognized globally as a
reformer on business climate, critical to enabling competitive markets and private
sector-led job creation. Georgia has made a number of investments and undertaken
critical reforms, which will facilitate Georgian involvement in the global business.
Georgia had relatively high growth with since 2010 of 5,6 %. However, the decline in
growth rate was in 2013 to 3,18% compared to the high in 6,95% in previous years.
Growth slowed to 2,8% in 2015 external environment curbed investment, exports, and
remittances in Georgia. (Georgia Economy, ADB 2016). Main sectors of the Georgian
economy are the following:
Economics 137
Table 1. Sectors of the Georgian economy (GEOSTAT, 2014)
Sector of the economy Sector % contribution
to GDP
Wholesale and retail trade; repair of motor vehicles, 15,8%
motorcycles and personal and household goods
Wholesale and retail trade 13,91
Transport 10.76%
Agriculture, hunting, and forestry; fishing 10,64%
Construction 7,44%
Communication 6,05%
Financial services 4,51%
Health and social work 4,35%
Real estate, renting and business activities 4,13 %
Proceeding of product by household 3,77%
Education 3,77%
Gender economic examines the disparity between the social-economic status of
women and men, which are determined by the gender roles and relations. There are
several models of various roles of men and women in the society in terms of labor.
According to one of the models, men’s labor is the main source of financial income for
families, and activities and subsistence of women and children are ensured by men’s
income. A man, as the main source of family income, is characteristic of industrially
developed countries and the business world, where men are mainly employed, and
where their labor is well paid. It is difficult for women to adapt in such world, where
there are deeply rooted assumptions that men are breadwinners. Women’s labor
assumes secondary importance in such thinking. They remain on man’s subsistence.
Change there has been, in assumption about the mothers` place in the labor market
and the need for social support for work-family reconciliation. Policy for mother`s
employment, including childcare, has been a key government priority. (Gillian Pascall,
2008). More and more women in EU are economically active. Women`s employment
reached the highest level ever recorded (64%) in 2014, while men`s employment
(75%) has yet to regain its pre-crisis level. As a result, more and more families depend
financially on women’s work. (Strategy Engagement for Gender Equality, 2016).
Unemployment issue is very critical for Georgia. It should be clarified the reason why
women`s unemployment level lower than of men`s unemployment. There are many
factors, which impacts in this field (see Table 2).
Table 2. Unemployment Rate by Gender in Georgia (GEOSTAT, 2015)
Years Women M en
2007 12,6% 13.9%
2008 16,1% 16.8%
2009 14,5% 18. 1%
2010 15,4,% 17,9%
2011 13,1% 16,7%
2012 13,8% 16,1%
2013 12,3% 16,5 %
2014 10,4% 14,3 %
2015 10,2% 13,5%
Researchers in various countries confirmed, that when men`s employment is getting
limited, employment among women decreasing insignificantly, remains the same or
138 Strategica 2016
altogether increases. The volume of unpaid work of women increases during
unemployment more, compared to men. Hence, women`s employment is more flexible
and sensitive to market fluctuations, that men`s employment, though
“commercialization” of the employment, i.e. share of unpaid in the total of labor costs is
significantly less compared to men. (Jashi & Tokmazishvili, 2009).
The global situation, economic and financial crisis, unemployment, the obstacles, that
women faced in the family and in the labor market are affecting the socioeconomic
status of women in Georgia. A gender imbalance exists in the labor market in many
countries, Georgia is not an exception in this regard. The gap between men and women
participating in economic activities and insurance source of income is constantly
growing. Changes of the gender structure of the Georgian society are very impressive
from the socioeconomic point of view. Nowadays the value of labor share of women in
the creation of national wealth is not defined at all. Therefore, women’s contributions
to national economic development are not often quantified and visible. Coming from
traditions of Georgia, family labor expenses are definitely high. Consequently, family
labor expenses 4 times exceed men's expenses. The most time of women is devoted to
earning – bread, the time left for increasing the level of qualification.
The labor market in Georgia is gender segregated. There are significant gender
differences in men’s and women’s employment by kinds of activity. Women are
concentrated predominantly in low-pay sectors such as education, health care, social
services, accommodation and food service, and households, while the men-dominant
sectors are relatively highly-paid. However, women make the majority of highly
qualified labor force: 161 highly qualified women specialists per 100 highly qualified
men specialist, among qualified specialists - 159 are women while among unqualified
labor there are only 5 women per 100 men (Jashi & Tokmazishvili, 2009). The labor
market exhibits horizontal and vertical discrimination, meaning that women and men
are under or over represented in specific occupations and that women have
opportunities for promotion career advancement. Women earn significantly less in
almost all sectors, although the gap closing gradually (Sepashvili, 2011).
Despite recent increases in women's educational attainment, women continue to earn
less than men in the labor market - even when they have the same education and years
of work experience as men. The gender gap in salaries is not significantly related to the
professional level of women. It is more closely related to inter-sectoral salary
differences. There is a peculiar status pyramid at work here, resulting in lower
positions for women. The vertical segregation so-called glass ceiling increasing large
income gap between women and men.
An analysis of different sectors of the economy shows that women usually occupy the
lowest position in a company or organization. In 2014 compared to 2010, the number
of economically active women increased by 1%, and that of men – by 3%. In the same
time, the number of employed women and men rose by 6% and 8% respectively. In
2014, the share of women in the total number of employed is 47%, while the share of
men is 53%. In 2014, the highest level of economic activity among women is observed
in the 45-54-year-old age group (80%). The employment rate is the highest (74%) in
the same age group while being the lowest (20%) in the 15-24 age group. As regards
the employment rate, the latter is higher among women aged 15-24 (29%). (GEOSTAT,
2015). Agriculture is the main pillar of the Georgian economy. At the same time, 58%
Economics 139
of women are living in rural areas, meanwhile, official statistical data prove, that
women are primarily engaged in self-employment sector. Agricultural sector suffers
due to lack of essential infrastructure necessary for agrarian business development
and insufficient new technologies. In rural areas, the primary source of income is petty
trade and agricultural activities. The lack of monetary resources is extreme and people
are forced to exchange good in order to satisfy their basic needs. Starting capital and
opportunities to find markets for the goods produced in a rural environment are
scarce.
The main problem of business development in Georgia is an insufficient level of small
business, which is very important for job creation and has a gender sensitive feature.
Although institutional barriers to doing business, as well as significant reduction of the
number of controlling bodies, has been decreasing in recent years, there is still no
friendly environment for promoting small business in Georgia. There are no legislative
limits for women to be engaged in entrepreneurial activities, however, they find it very
difficult to do business. There are many reasons for this: violation of property rights,
lack of value chain information, limited access to bank credits and new technologies
etc. Unemployment, low wages, and pensions, increasing social injustice, and
decreasing the purchasing power of the population remains crucial issues in Georgia.
Despite these challenges, there is growing evidence that female entrepreneurs are
becoming an important economic force. Georgia is a transition stage in terms of
women`s involvement in business. The number of employed in the business sector in
2014 amounted to 592 Thousand persons (64%more than in 2007) where 52% are
women and 59% of men work in large enterprises. (GEO STAT, 2015). It should be
noted that there is a good trend of increasing women positions in the structure of
managing economic policy in the country.
Positive and negative aspects of international trade policy
Georgia involvement in the international trade organization began in 2000 year.
Georgia became the 137th member of the World Trade organization. Accession to the
WTO was a significant step in the process of transition to a market economy. However,
it was a more political decision, rather than oriented on the economic consequences.
The process of accession to the WTO was preceded by a series of substantial changes
in national legislation in the areas of intellectual property; trade-related investment
regime; trade in services; government procurement etc. The Georgian government
hoped that by assuming a place in the global trading system, it would achieve
prosperity and stability and expand its activity in the world economic arena. The
membership in the WTO has encouraged Georgia’s integration with Europe. The
Georgian government has committed to implement all international obligations
regarding tariffs, international investments, and a favorable business climate in
Georgia, which are supposed to facilitate the growth of economic development. The
advantages created by membership in the WTO have not been fully realized.
Trade policies have a significant impact on the viability of micro and small enterprises
and thus affect a large number of women who own or work in these businesses. The
constant growth of international trade requires a cheap labor force and women were a
given priority mostly in the spheres of trade and services. In the middle and high-
income family labor of women was substituted by hiring a workforce, the majority of
140 Strategica 2016
women moved from unpaid family labor to the paid sector, while they were replaced
by labor migrants from low-income countries. Despite women qualification and
professionalism, migrant women are being employed at a lower stratum of the service
infrastructure. This issue is very painful for Georgian families, because of 55 % of labor
migrants from Georgia are women and their remittance contributions are very solid.
Small and medium entrepreneur women are engaging in exporting agricultural
products (fruit, nuts, and vegetables). Agriculture is the sector that most likely suffers,
because of mechanisms for domestic protection is insufficient. The EU-Georgian
Partnership and Cooperation require aligning Georgian regulatory mechanisms with
European trade and investment standards. So far, however, success has not been
achieved in this field. European markets are not widely opened for Georgian products.
Talks between Georgia and EU on agricultural products began in 2007 and are still
under way.
The main reason why Georgian products have not exported widely to the EU is that
they cannot offer an attractive product meeting the quality and safety standards of the
European market. Other barriers for would include: the poor quality of their
merchandise, difficulties in penetrating foreign markets and their lack of credit
marketing skills. It is difficult for the local entrepreneurs to comply with AA/DCFTA
requirements, implement the necessary changes.
In recent years, Georgia's main exports have been food products, transport related
equipment, iron and steel, fuels and minerals, and chemical products. The fastest
growing exports are food (especially nuts, which make up a large portion of food
exports), transport equipment and chemicals. Women are most present in food and
chemicals business, while men predominate in areas of machinery, metals, and energy.
Georgia’s foreign trade has grown rapidly since 2005 because of aggressive policy re-
forms to make it easier and less expensive to trade across borders. In 2008 total trade
turnover increased by 25%, with exports increasing by 28% and imports by 24%. In
2009 Georgia`s foreign trade turnover with EU countries reached 32.8% less than in
the same period the previous year. However, in 2010, Georgia's foreign trade turnover
was 6, 678 billion USD (excluding unorganized trade), which is by 21% more than in
2009. At the same time, Georgia can expand its cooperation with the EU and take
advantage of new opportunities in the framework of the ENP in order to achieve the
above-specified goals. In 2010 Trade with EU countries accounted for 28.1% of the
country’s total foreign trade turnover: exports for 21.3%, while imports for 29.8%. In
2014 preliminary external merchandise trade (excluding non-organized trade) in
Georgia is 5% higher year-on-year. The exports equaled 2% lower, while the imports
stood 7% higher. The negative trade balance was USD 5735 million in 2014 and its
share in external trade turnover constituted 50%. (GEOSTAT, 2015) (see Table 3).
Table 3. External Trade (Million USD) (GEOSTAT, 2016)
2007 2008 2009 2010 2011 2012 2013 2014 2015
External
trade 6444 7797 5634 6935 9225 10413 10921 11454 9933
turnover
Export
1232 1495 1134 1677 2187 2376 2910 2861 2204
(FOB)
Import 5212 6302 4500 5257 7038 8037 8012 8593 7729
Economics 141
(CIF)
Balance -3980 -4806 -3367 -3580 -4852 -5661 -5102 -5733 -552
The EU has been one of Georgia`s major trading partners for years in 2010-2014, the
EU`s share in Georgian exports rose from 18% to 22%, while its share of Georgian
imports remained stable at 28%. (Spear, Kakanova & Magdluyk, 2016). Last statistics
demonstrate that in 2016 the external trade of Georgia with the EU countries
amounted to USD 137 million, lower by 25% compared to the corresponding indicator
of the previous year. Exports amounted to USD 38 million (38 % lower), while imports
amounted to USD 99 million (18 % lower). The share of these countries in the external
trade of Georgia amounted to 26 %, 31% in exports and 24 % in imports .21 %of the
trade deficit came to the EU countries (GEOSTAT, 2016).
The volume of exports from Georgia to the EU countries is rather small and needs to be
diversified. Although Georgia enjoys privileges under the European Union`s
Generalized system of preferences Plus only several companies and products have the
benefit from the scheme so far.
Among the top ten destinations for Georgian exports, only three are EU member states:
Germany, Bulgaria, and Italy. Import tariffs have been abolished on almost 90% of
goods, and only three low rates remain (0%, 5%, and 12%) instead of the previous 16.
Georgia has no import tariffs on machinery and equipment. The 12% and 5% import
tariff rates are levied on certain types of agricultural products and construction
materials. Tariffs are also applied to imports of alcoholic beverages and passenger
vehicles. The top ten trade partners of Georgia made 67% of the total trade turnover in
2010. The top three trade partners are led by Turkey (by USD 1.105 billion),
Azerbaijan is a runner up (by USD 708 million), and Ukraine - by USD 662 million. The
main challenges Georgian products face on the EU market are non-tariff barriers and
the current lack of domestic control management infrastructure. The DCFTA offers
Georgian businesses a variety of new opportunities, as well as the chance to
consolidate existing export segments and move up value chains. Small business can
benefit if they can meet the EU`s rigorous quality and technical requirement, recruit
managers, professionals and workers with the necessary experience and skills (Spear,
Kakanova & Magdluyk, 2016).
The researchers demonstrate the importance of integration of gender aspects in the
trade policy in Eastern Europe. Women could have concrete benefits from exports of
Georgia to the EU markets. Potential trade-and-gender beneficial effects could be good
export and investment prospects niche segment of agro-production, textiles/clothing,
metal, machinery and electrical equipment, chemicals, and services. Women constitute
a large percentage of employees in promising areas. There is an urgent need to have
women and men in the international market with the necessary professional skills.
Assessment of the Impact Potential Free Trade Agreement between EU and Georgia
prepared by UNDP in 2007, which identified the positive and negative aspects of
international trade relations. It is obvious that trade does not automatically bring
prosperity to Georgia, but it can be a powerful tool for economic development and
utilize trade. Georgia should shift to an export-oriented strategy and enter into a long-
term and state business and politically friendly relationships. Trade liberalization will
have little impact on the wage structure. Indeed, wages are expected to increase,
142 Strategica 2016
average by an extra 0.05 in the agricultural sector against 0,8-and 0,2 in the
manufacturing and service sectors. (Assessment of the Impact Potential Free Trade
Agreement between EU and Georgia, 2007).
Hence, an EU-Georgia is not expected to result in a dramatic increase of inequalities
between workers and the deterioration of the economic situation of the most
vulnerable groups in Georgia. According to the Rural Development Strategy 2015-2020
of the government aims to create an environment, that will increase competitiveness in
the food sector, promote the stable growth of high-quality agricultural production,
ensure food safety and security. It is significant to improve food safety standards and
sanitary controls, which allow Georgian products to enter the EU market. Trade
liberalization has different implications for different groups of people through its
impact on prices, employment, and production structures, and tends to benefit those
who already have access to credit, export markets, transportation and other
infrastructure, including technology and land. When women are members of producing
and selling groups take-up market-oriented production and start actively participating
in marketing processes, this point is very important for Georgia, because one of the
challenges for women entrepreneurs are to be involved in the export production.
Conclusion
Processes of reforms, that affected practically all sectors of the economy, conditioned
significant differentiation of women based on income, the level of life, conditions in the
labor market, and demands in particular forms of social support.
There are strong needs for in-depth analysis of the impact of trade agreements on
gender. Studies on gender and foreign trade, gender, and macroeconomic reforms,
gender and labor reforms could feed the discussions. Currently, there is a lack of
information and research on this issue in Georgia. The absence of gender evaluation
and monitoring of State interventions in the labor market makes it difficult to see the
gender perspectives of a situation. Gender statistics of the labor market should be
maintained on a regular basis.
The effects of trade on women, who make up the vast majority of Georgia’s poorest
citizens, should be carefully examined. A small increase in income could have an
enormous impact on a poor woman’s quality of life. Impact on inequalities and poverty
is an important issue related to the potential consequences of EU-Georgia free-trade
agreement. In fact, trade may have both positive and negative impacts on poverty and
inequalities. The positive effects will be increased in foreign investments and
stimulation of domestic because of increased purchasing power of households.
Experts from the different countries contend that any country’s business development
lies at the basis of gender equity. Given this, the International Finance Corporation
(IFC), USAID, European Bank for Reconstruction and Development and UNDP and EU
organizations are permanently fostering discussions for promoting gender equality
with a focus on economic opportunity.
At last, it should be concluded, although Georgia has stated that it shares the European
values, the country’s state structures and institutions do not always adhere to them.
Economics 143
The introduction of gender equality principles into the business remains problematic.
The pace of democratization in Georgia and the country’s chances of getting assistance
from western democracies in the process depends on how efficiently common
European values are adopted by the country. Respectively, the intensity of AA /DCFTA
implementation between Georgia and the EU in the near future will be determined by
the country’s success in abiding by the principles of market economy, social justice,
and gender equality.
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Finance and Banking
Finance and Banking 147
MANAGING THE MARKET RISK IN BANKS
Laurenţiu-Mihai TREAPĂT
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
laurentiu.treapat@facultateademanagement.ro
Lucian Claudiu ANGHEL
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
lucian.anghel@facultateademanagement.ro
Abstract. On an international level, the last 30 years brought constant increases in
the global exposures of the banks (and not only), towards the market risk. All these
dependencies and risks, if not properly known and managed, are turning into threats
for the entities or persons that have exposure to the monetary market, on the foreign
currency market and also on the capital market. These risks were strongly
acknowledged in Romania also, following the markets liberalization, creating
confusion in many instances and also creating dissatisfaction among the ones that
were registering losses. For such reasons even, the current paper aims to scientifically
explain the necessity to introduce and use, at a wider scale, some management
techniques and instruments for fighting the market risk that has to be assessed
before registering any losses and to be understood in exact quantitative terms. The
paper presents methods to determine the market’s volatility and ends by presenting a
case study in which is illustrated how can be optimized a title portfolio consisting of
„n” financial assets that are temporarily owned by a person so that this person’s
exposure to the market risk should be evaluated and diminished. Such an indicator
that, by a single value, calculates the total exposure risk by a portfolio of this kind is
VaR indicator. This way of ratio calculation is actually a scientific method for
historical portfolio simulation and presents the advantage that the methodology
relies on a real distribution of probabilities.
Keywords: Market Risk; VaR; assets and liabilities; volatility; interest margins.
Introduction
In Romania, the market risk became present once its effects appeared in 1990
(Treapăt, 2004) at the same time with the markets liberalization: monetary,
financial, foreign currency, with establishing the capital markets and the stock
exchange market, with creating new financial products, namely the derivatives.
The exposure to such risk may occur as a result of some speculative positions
deliberately taken by the bank (own account trading) or may derive from the
market creator activities for the clients (dealing). The modification of the
conditions on the financial markets may affect the bank through the main three
interdependent but separately managed transmission channels. These are: the
variation of the evolution trend and of the level of the interest rates, the variation
148 Strategica 2016
of the foreign currency exchange rate and consequently, of the local currency value
of the various assets and liabilities expressed in foreign currency and the variation
of the financial assets rate that may affect the market value of the titles portfolio
and the value of the titles issued by the bank (bonds or shares). The financial –
banking markets developed also in Romania together with the globalization
process, the derivate financial instruments began to be more intensively used,
either for protection reasons against the adverse reactions resulted from the
market evolution, or purely speculative, trying to obtain advantages depending on
the conditions existing on the market.
In our opinion, particularly the usage of such financial instruments induces
additional risks at the banks’ level, at a systemic level and then, until the crisis
unleashes, there is just one single step left. All these market risks types are
represented by the author in Figure 1.
Figure 1. Types of Market Risks
The Interest Rate Risk is in relation with the position associated with the fixed
revenue titles and with their derivates, as Ross, Westerfield, and Jordan (2010)
considered. The risk factors that are in the direct relation with the interest rate are
estimated in each currency for which the bank has positions that are sensitive to
the interest rate, within the balance sheet and also outside. The risk factors refer to
the portfolio’s sensitivity accepted by the market, where the short and long
position on various instruments may be compensated. It is known that the bank
has a „long position” when the assets with fixed interest rate are bigger than the
liabilities with fixed interest rate. This position is favorable to the bank during the
periods of interest rate decreasing, as it benefits from the fixed level of interest
rates for the assets (that are bigger), in a period of time when the interest rated are
decreasing. The position of the bank is „short” when the assets with fixed interest
rate are smaller than the liabilities of the same type, and this is to the bank’s
benefit, in the period of interest rate increase, as the level of the interest rate stays
fixed at a lower level compared with the market trend.
The objective of any bank concerning the prevention of the risk associated with the
variation of the interest rate is to achieve an as large as possible margin between
the average level of the passive interests and the one of the active interests, and
also maintaining this margin for as long as possible, meaning, in conditions of
minimum volatility of the market.
The Foreign Currency Risk or the risk of currency rate is determined by the
probability that a variation of the currency rate of the market to lead to a net profit
diminishing for the bank or to negative influences upon the banking interest
margin. Several studies, such as Ionescu (2003) and Roxin (1997) underline that
Finance and Banking 149
the risk impacts, obviously, the banking operations in foreign currency, performed
on own name or to the clients’ orders, the exposure being directly proportional to
the difference between the assets and liabilities in foreign currency from the same
maturity category, and has three components. The first component is the exposure
due to banking transactions developed with assets and liabilities that sensitive to
risk. The second is represented by the exposure associated with the operations of
conversion from one foreign currency to another, and the last one, by the economic
exposure that undertakes the influence of the foreign currency rates fluctuations
upon the bank’s value and is calculated as the discounted value of all the incomes
obtained by the bank, in all its operating foreign currencies.
The Risk of Shares represents the probability that a bank registers losses or not
achieves the estimated incomes, following the unexpected modifications of the
owned financial assets prices on the market. This risk category refers to having the
certain positions in the trade register, positions that are related to the shares or
instruments having a similar behavior and their derivates (e.g. Futures and
Swaps). Also, the risk related to shares is calculated for the specific risk that is
associated with the ownership of a title and also, for the position on the market, as
a whole. For the derivates, the risk is evaluated by converting the derivate into a
notional position of shares on the initial instrument. The equilibrium prices are the
ones that settle the market based on the rate between the demand and supply.
When this report is unbalanced, the prices of the financial assets register
significant variations that express the volatility of the price. For a complex and
diversified portfolio of financial assets, the effect of some titles’ variation may be
compensated, at least partially, by reverse variations of other ownerships, fact that,
at the level of an entire bank that professionally manages the assets and liabilities,
may not only lead to loss avoiding, but also has to lead to profit making.
We may thus state that the sources of risk on the market are the price variations of
the financial portfolio, of the own capital instruments, of the interests spread and
of the foreign currencies exchange rates. This is why, its major components are the
risk related to the shares position, the risk related to the goods, the risk of the
interest rate and the foreign currency exchange rate risk.
Methods for evaluating and measuring the efficiency of the risk covering
operations
This extended development of the derivate instruments that we have mentioned
before, allowed the banks to cover the risk of the open positions in more and more
complex ways. Yes, as the liquidity of the market is a crucial precondition for using
such instruments, there increased the researchers’ preoccupation concerning the
evaluation and the efficiency of the risk covering operations, by more sophisticated
methods. These preoccupations are also the focus of our current work and thus, we
will perform an empirical analysis of the most used methods of evaluation and
measurement of the Romanian banks’ exposures to the risk.
150 Strategica 2016
The Value at Risk (VAR)
Most of the banks that are key actors with big exposures to the market risk have
implemented complex risk indicators and instruments for evaluating the impact of
the risk upon the activity, tools that can be applied to different markets. Although
the specific arrangements may differ, these internal evaluation models are usually
framing into the common conceptual scenery. Typically, these models are
evaluating the aggregated exposure to the market risk a bank has and, given the
probability level, they estimate the amount that the bank would lose if it owned
certain assets for a certain period of time. As such models, relying on VAR cover a
series of market risks, the bank may „adjust” its portfolio’s structure, by choosing
from a series of options for diversifying its portfolio, for reducing the risk it is
exposed to and/or the associated capital requirements.
The data that are the input in the VAR-based model comprise information about
the bank’s positions and the prices, the volatility and their risk factors such as the
term of the assets. The data must be comprehensive enough for illustrating all the
risks that are incidental to the bank’s balance sheet positions and to the positions
outside the bank’s balance sheet. All the risks that are covered by the model must
include all the positions related to the interest, foreign currency rate, shares,
commodities and to the options in the bank’s portfolio.
The evaluation parameters include the duration of ownership, the historical time
span considered for the observation, the prices of the risk factors and the trust
interval that allows a prudent judgment for the optimal protection level (meaning,
that identifies the maximum acceptable losses).
The time span considered for the observation will be chosen by the bank so that it
can surprise the market conditions that are relevant for its risk management
strategy. Usually, the internal models combine the potential modification of the
value of each position that would result from the variations that are specific to the
basic risk factors, with the probability that these variations occur. The value
modifications are accumulated at the level of the segments in the trade registry
and/or for all the activities and markets. The VAR value may be calculated by using
one method from the ones depicted bellow:
- The method of the historical simulation that calculates the hypothetic modification
of the value of the current portfolio, based on the historic variations of the risk
factors. (at a level of trust of 99%, we could consider the lowest value out of 100
daily observations and apply this profitability to the current portfolio, for thus
determining the maximum loss for the following);
- The delta-normal method or of the variance/covariance is the widest used method
by the portfolio managers. This assumes that the distribution of the assets
profitability is normal and that the daily profitability is successively independent
(meaning it is not influenced by the previous day’s profitability).
- The Monte Carlo simulation method builds the distribution of the current
portfolio, by using a larger sample of random combinations of price scenarios,
whose probabilities are, usually, based on the historical experience. This approach
is more flexible than the other two methods and does not rely on hypotheses about
the normality of the profitability, but the scenarios number rapidly increases along
with the portfolio’s complexity and with the related risk factors.
Finance and Banking 151
The Basel Committee established certain quality standards for the internal models
when they are used in the context of capital adequacy. The qualitative standards
comprise a trust interval with one single limit, of 99%, an ownership period of 10
trading days and a historical observation time span of minimum 1 year, if the
recent volatility of prices was high.
The Stress Test
The scope of the stress test is to identify the events and influences that may
generate a loss – namely, the ones that have a negative impact on the position of
the bank’s capital. The stress tests must have a both qualitative and qualitative
nature. The quantitative criteria must identify possible stress scenarios that might
occur within the market environment that is particular for a bank. The qualitative
criteria must focus on two key aspects of the stress test: the evaluation of the
bank’s capacity to absorb big losses and on identifying the measures that the bank
can take for reducing the risk and for preserving the capital.
The results of the stress tests must be periodically revised by the committee that
manages the risk and by the superior management and must be reflected, as
necessary, into the upcoming modifications regarding the policies for specific risk
management and the exposure limits. If the stress tests indicate certain
vulnerability, the bank must immediately take the necessary measures concerning
the situations and the risks that generate the respective vulnerability. The stress
test scenarios and the testing results are, usually, subject to a supervisory attention
(Central Bank).
Mark to market activity
It refers to (re)evaluating one’s bank’s portfolios for reflecting the variation of the
assets prices due to the fluctuations of the price on the market. The volume and the
nature of the activities a bank engages in determine, in general, the prudent
frequency of the evaluation. It is considered prudent a bank to (re)evaluate the
positions of the investment portfolio having a stable liquidity, at least monthly. As
the assets in the trading portfolio are being continuously sold and purchased, the
positions related to the trading portfolio of one bank must be evaluated and
marked to the market at least once a day.
The advanced IT technology, available in the recent years, was compulsory for
developing many new instruments. The technology improved the quality and the
access to information, and this, in its turn, increased the efficiency and the liquidity
of the interfacing secondary markets. The modeling and the analytical techniques,
supported with pertinent and exact information and that are consistent at an
internal level, offer the necessary technical support for developing the transactions
and the decision-making acts.
This technological capacity allowed the banks to engage themselves in trading,
meaning, to assume positions for financial instruments, including positions for
derivative products and outside balance-sheet instruments.
152 Strategica 2016
The management of the interest rate variation risk
The objective of each bank, in what the prevention of the interest rate variation
risk concerns, is to achieve an as wide as possible margin between the average
level of the passive interests and of the active interests and maintaining such a
margin for an as long period of time as possible, meaning in conditions of
minimum volatility of the market. On the background of a keen banking
competition and of a constant economic increase, the interest rate margins are on
an ascending trend that is normal, considering the fact that the average passive
interest cannot decrease below the level of inflation.
Along the elaboration of the current paper, the Romanian economy registered
positive levels of economic growth every year, this trend being interrupted within
the 3rd quarter of 2008. The effects of the global economic crisis started to be
perceived in Romania during the 4th quarter of 2008 and afterward, along 2009
when, in April, after two subsequent quarters of GDP decrease, the Romanian
economy fell into recession to come back to growth only after 6 years. In such
conditions, the banks’ preoccupations for stabilizing and maintaining the margin is
to be understood, as, from practice, we know that, between 2003 and 2007, there
existed banks that practiced margins between 12 and 18 p.p. for the interests in
national currencies and between 7 and 8 p.p. for the loans granted in foreign
currency. Of course, the margins decreased nowadays, but still, they are high.
Thus, we got to the situation that the weight of the incomes from interests to be
between 60-70% from the total incomes achieved by some banks or even more, for
the banks that do not have such a wide range of products and services to bring
commissions or other non-interest incomes. A different situation in what the
margin between the active and passive interests concerns could be acknowledged
starting with the 4th quarter in 2008 and was properly felt during 2009, following
the financing sources’ severe price increase on one hand, and the blocking of the
real estate market, on the other. This fact determined the dramatic decrease in
what the demand of loans for immovable assets or the mortgage loans concerns
and also of the consumption loans.
The bank’s sensitivity to the interest’s variation on the market, is illustrated by the
margin’s variation, under the influence of, at least, two categories of factors:
internal, respectively the ones that are related to the balance sheet’s structure, the
assets quality, the account receivable eligibility, the maturities management, etc.
and external factors related, mainly, to the general economic conditions, the
political and social stability, etc.
The indicators of the interest rate variation risk are the gap and the sensitivity
indicator. Consequently, the bank’s immunization strategy against the interest rate
variation risk is to have, at any moment, a null gap and an indicator that equals 1.
In the banking practice, the methods used for reducing the interest rates variation
risk are using, as much as possible, the adjustable interest rates and operations
outside the balance sheet, by covering the tenors gaps through swap or term
contract with options.
Finance and Banking 153
The foreign currency risk management and of the price variation for the
financial assets
The Foreign Currency Risk represents the possibility that an adverse variation of
the foreign currency exchange rate to produce losses or to lead to not achieving the
targeted profits, to a bank. The risk obviously targets the banking operations in
foreign currency, performed in own name or at the clients’ orders, the exposure
being directly proportional to the difference between the assets and the liabilities
in foreign currency belonging to the same tenor group and having three
components:
- the exposure due to the banking transactions developed with assets and liabilities
that are sensitive to this risk;
- the exposure associated with the conversion operations from one currency to
another;
- the economic exposure that undertakes the influence of the foreign currencies
fluctuations upon the bank’s value and that is calculated as the un-updated value of
all the obtained incomes, in all the operating foreign currencies.
The indicators for measuring the foreign currency risk are the individual foreign
currency position and the gross (total) foreign currency position. The individual
foreign currency position is calculated separately for every currency in the bank’s
portfolio and it is considered to be:
- a long position, when the assets expressed in a certain currency are bigger than
the liabilities expressed in the same currency and have a favorable evolution when
the rate is on an ascending trend.
- a short position, when the assets expressed in a certain currency are smaller than
the liabilities expressed in the same currency and have a favorable evolution when
the rate is on a descending trend.
The gross (total) foreign currency position is calculated as a net balance of the
accounts receivable in foreign currency towards the liabilities in foreign currency,
both converted into the reference foreign currency, for comparability reasons. This
gross foreign currency indicator is being used more for statistical purposes, the
operational relevance being limited by the generality of the provided information.
The bank’s exposure to the foreign currency risk is measured by the proportion of
the individual foreign currency position, separately managed for each foreign
currency. The foreign currency position of each foreign currency is calculated on
daily basis, as an algebraic sum of the balance sheet foreign currency position and
the outside balance-sheet foreign currency position for the respective foreign
currency, this being long when the result is positive and short when the result is
negative.
The Management of the Price Variation Risk for the Financial Assets represents the
probability that a bank registers losses or not achieves the prospected incomes, the
result of the unforeseen modifications of the prices on the market for the owned
financial assets. The equilibrium prices are the ones that adjust the market based
on the request and demand ratio and when this ratio is unbalanced, the prices of
the financial assets register significant variations that express the volatility of the
price. For a proper management of the prices volatility, we have to analyze the
154 Strategica 2016
factors that generate and feed this instability and to search for remedies for
placing these variations within an acceptability range, beyond which the exposure
to risk must be necessarily covered by specific methods. These disturbing factors
for the financial assets prices may be:
- general, related to the macroeconomic policy modifications, to the overall status of
the economy that is characterized by the economic increase, GDP, the price
increase indicator, the evolution of the interest rates and of the exchange rate etc.;
- specific, that are related only to certain titles given some situations or
circumstances due to which their prices vary compared with other titles.
This is why, for a complex and diverse portfolio of financial assets, the effect of
some titles variations may be at least compensated with reverse variations of other
owned elements, that, at the level of a bank that manages the assets and liabilities
in a professional manner, may lead not only to loss avoidance but must also lead to
profit making.
Conclusions, findings, and outlook
For demonstrating the practical utility of applying the measures for estimating and
diminishing the market risk in the daily activities of the companies and persons
that temporarily have certain liquidities, we present a calculation example for a
titles portfolio with “n” financial assets that we can call optimal or immune to the
market risk, of course, in certain limits that we will describe in the following part.
A particular situation from the issues presented above is due to the fact that many
banks build portfolios from the financial assets that exist on the market and also
offer the possibility for the clients to build deposits by investing in such portfolios.
In the structure of some portfolios of this kind, there are mainly bonds issued by
the state but also other kinds of financial assets. As any investor in such a portfolio
is permanently exposed to the market risks, it is useful to follow an indicator that,
by a single value, calculates the total inducted risk by a portfolio of this kind,
without spreading it at the level of the risks created by every asset in particular. A
response to such a necessity is represented by the value at risk (VaR).
For modeling the phenomenon, we consider a portfolio consisting of N financial
assets, according to the description above, in the present moment “t”.
We note with Si(t), i= 1,2,3,…., N, the value of the asset i at the moment t, and we
admit that the number of assets i included in the portfolio is ni. Then, the value of
the portfolio at the moment t will be:
N
∏ (t) = ∑ ni(t) Si(t)
i=1
Legend:
- Si(t) – the value of the asset i at the time moment t ;
- ni – the number of assets purchased by the bank, at the value that was taken into
consideration in the present formula;
- ∏(t) – the value of the built portfolio;
Finance and Banking 155
- V – VaR ;
- R – the number of necessary simulations for determining the VaR.
The value of the portfolio at the moment t will change in time, both due to the
modifications in the portfolio’s structure (the numbers ni(t)) and also to the
modification of the values of the components Si(t). Consequently, we can speak
about a future value of the portfolio ∏ (t + Δt) after Δt time units.
We call the value at risk (VaR) that corresponds to a certain period of time Δt and
to a level of trust of p percents, the number V bellow which the value of the
portfolio at one point t + Δt will not decrease, with a level of trust of p%, namely:
probability [ ∏ (t + Δt) ≥ V] = p
For the banks’ case, it is recommendable that, for calculating the value at risk, to
use the following values: Δt = 10 days and p = 99%. Then, we can express more
eloquently that, for a surety degree of 99% in the following 10 days, the value of
the owned portfolio will not decrease under V monetary units. Of course, the
values in view for Δt and p can be modified as the user of the model wish.
We would also like to mention that the relation for defining the value at risk can be
written in equivalent, as follows:
probability [ ∏ (t + Δt) - ∏ (t ) < V] = 1- p
A high number (K) of simulations are to be done for the evolution of the financial
assets prices that are included in the portfolio’s structure. For every simulation,
the future value of the portfolio will be calculated [ ∏ (t + Δt)]. Out of these, we will
keep in mind K(1-p) unfavorable values and consequently, the K(1- p)+1 value, in
an increasing order, will be VaR. If we have a database available, containing the
daily movements of prices for the assets in the portfolio (and, of course, any bank
have such statistics), it can be used as a simulation fund. This way of calculation
called historical simulation presents the advantage that, the method relies on a
distribution of probabilities that really existed. This way we can demonstrate not
only the scientific validity of the method but also its practical utility for the
investors.
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Finance and Banking 157
CREDIT RISK AND RATING REGULATION:
A COMPARATIVE STUDY APPLIED TO THE CHINESE
AND EUROPEAN FINANCIAL MARKETS
Xuheng TONG
University of Lorraine
13 Rue Michel Ney, 54000 Nancy, France
tong.xuheng@gmail.com
Abstract. An introduction to rating regulation starts to set the stage of the paper.
The public intervention is necessary clearly revealed by recent crisis and justifies the
importance of the research. It is also interesting to have a look at different
approaches used by Chinese and European authorities under an evolutionary and
comparative perspective. It provides us with a good example of sectoral and
integrated supervisory system. Credit rating is firstly used for bond investors. Since
bond market is less liquid and both Chinese and European stock market represent
special characteristics, related to segmentation on one hand and integration:
Euronext Paris, for instance, on the other hand, we chose to examine the informative
impact of Credit Rating Changes (CRCs) on daily common stock returns of publicly
listed companies (issuer ratings) and on the equivalence of the issued senior non-
guaranteed bonds (issue ratings). The study covers 16 years since the new century
where Credit Rating Agencies(CRAs) started to actively perform on both markets
(from 01/01/2000 to 01/01/2016), the same methodology of a classic event study
with market model enables us to compare and to analyze the results under different
institutional environment between mature and emerging market. We found Wealth
Redistribution Hypothesis (WRH) from bondholders to shareholders rather evident in
Chinese market while in the French market, the results are in the line of theory
framework and thus valid the Signaling Hypothesis (SH) in the literature, showing no
significant Abnormal Returns (ARs) for upgrades and negative significance for
downgrades. Secondly, we found that reactions of Chinese investors evolved into the
different direction. They took downgrades as “bad news” before the crisis (2008) and
“good new” afterward. As for French investors, there were significant positive
reactions to upgrades independently to the period while significant negative
reactions were observed only before and during the crisis to downgrades. The
behavior of CRAs is the third angle to explore the subject. Migration tables showed
that Chinese local CRAs, compared to “Big Three”, are systematically more generous
in giving better ratings. Besides, we also witnessed a recent fast increase of market
share of CRAs adopting investors-paying models, such as China Credit Rating Co.
(CCRC) and Egan-Jones Ratings Company (EJR).
Keywords: rating regulation; Credit Rating Changes (CRCs); event study; Chinese
and European financial market; institutional environment; financial crisis; local and
global Credit Rating Agencies (CRAs).
158 Strategica 2016
Introduction
Credit Rating Agency (CRA), just as the name implies, is a kind of organization
whose basic function is to assess the level of credit risk of the specific financial
instrument and their issuers for both private and public entities. This appraisal
will be concluded and disclosed in the form of rating to the public.
The paper starts with an introduction of different rating regulation present in
China and in Europe. The different approach, sectoral and integrated, could be
justified by the specialties of each market institutional environment. Jorion (2005)
and Alsakka, Gwilym, Klusak and Tran (2015) both showed the change of
regulatory regime could have incidences on ratings.
Then, we are going to examine reactions of common stock investors to Credit
Rating Changes (CRCs) by calculating the Abnormal Returns (ARs). The purpose of
this research is to verify or refute the hypothesis, based on theories and literature
review departing generally from Anglo-Saxon stock markets. It is also interesting
to see the influence of financial crisis (2008) playing in the game. The third interest
of our research concerns the behaviors of both global and local CRAs, not only
conceptually but also empirically.
Our work brings several contributions. Firstly, we concentrate on the Chinese stock
market, a representative example of emerging market. There are few studies such
as that made by Poon and Chan (2008). The objective of the study is to use a more
general sampling and to cover a relatively comprehensive period (01/01/2000 to
01/01/2016). Besides, our study gets profound by a comparison with the French
market, a representative continental European market. This perspective is rare:
researchers are used to taking North American market as a benchmark. The choice
is neither random. Chinese and French market present different institutional
environment (segmentation and integration) and the evolution of rating regulation
approaches. The day of Lehman Brothers’ bankruptcy: 15/09/2008 marks the
crisis, contributing as a separating point to analyze the general results. Thirdly, we
plan to examine CRAs from the inside of the organization by behaviors of both local
and global CRAs.
The paper begins with background information concerning rating regulation and
the corresponding institutional market environment in section I. Section II is
devoted to the relative theory framework and a literature review of Credit Rating
Changes (CRCs). The research design is going to be detailed in section III, along
with the results presentation (section IV). The paper is finished by a descriptive
analysis of CRAs’ behaviors (section V).
Setting the stage: rating regulation
The recent crisis witnessed some dysfunctions of the information intermediary and
risk assessor and brought about a series of criticisms pointing to CRAs. Beyond all
critics, public attention has shown, conversely, that the private organization is
becoming an indispensable part of the financial market and it affects, indisputably,
Finance and Banking 159
the decisions of market actors, both issuers and investors, either individual or
institutional.
Under this context, Chinese and European financial authorities have taken different
paths to retrieve the control of rating, with different regulation philosophy. The
choice of system is not random but should correspond to their respective
institutional environment.
China adopts the sectoral structure, with People’s Bank of China and other three
separating regulators dedicating to financial domains (banking, market and
insurance companies). Even though the lack of cooperation is considered as a
natural drawback to being corrected, it meets current needs of regulation for a
sector that is still at the preliminary stage and is highly segmented.
Contrary to the Chinese rating regulation, European National Competent
Authorities intend to conglomerate their supervisory structure by increasing the
participation of national central banks in rating supervision. It shows that, when
the market economics has arrived on a certain stage, the artificial dividing border
among financial activities should disappear, with the complication of financial
products and the universalization of financial organizations. However, whether
their choices on the national level, after the regulatory reforms post-crisis in 2011,
ESMA (European Securities Market Authorities) has harmonized the rating
regulation on the European level.
Theory framework and literature review
According to the Theory of information asymmetry, problems of moral hazard
would easily happen. Debtors may secretly take more risks at a low cost than they
are allowed by the contract. Under this circumstance, CRAs work as a “coordinative
mechanism” (Boot, Milboum & Schmeits, 2006) between issuers (borrowers) and
investors (lenders). Pinches and Shingleton (1978), and Kliger and Sarig (2000)
agreed with the Theory of information content. Ederington, Yawitz and Roberts
(1987), Griffin and Sanvicente (1982), and Elayan, Wei, Fayez and Meyer (2003)
went further and considered ratings as private information, among which there
are CRCs.
The notion of modification of ratings contains two meanings: “Upgrading” means
the appreciation of issuers’ ability to honor their debt or an increase of their
overall financial situation; while “downgrading,” means that CRAs lose faith on the
creditworthiness of issuers or their obligations.
Since our theme accords attention only to informative impact on stock market, in
the line of Theory of Signal (Spencer), our concentration will focus on a series of
paper on the same field, among which we may cite the works of Holthausen and
Leftwich (1986), Glascock, Davidson and Henderson (1992), Hand, Holthausen and
Leftwich (1992), Dichev and Piotroski (2001), and May (2010). The conclusion of
research could be presented, in a general way, that “downgrade” has a negative
significant impact on the market, but in the case of “upgrade”, there was usually no
obvious reaction statistically.
160 Strategica 2016
There are a few studies applied to a European country, for France (Francois-Heude
& Paget-Blanc, 2004), German (Kenjegaliev, Duygun & Mamedshakhova, 2016),
Spain (Abad-Romero & Robles-Fernandez, 2006, 2007) and Sweden (Li, 2004) and
the results are quite mitigated.
With a fast development in economics, emerging countries start to attract the
attention of the academic world, but the amount of paper is quite limited. Han et al.
(2009) conducted a study about local markets of 26 developing countries and their
study showed no informative impact of CRCs.
Research design
We adopt a traditional methodology, initiated by Brown and Warner (1984),
Dyckman, Philbrick and Stephan (1984), Holthausen and Leftwith (1986) in
studying the informative impact of CRCs. The use of event study (Table 1) requires
market information of the exact day when CRCs happened and the database
Bloomberg makes it easy to get day-to-day returns, either for daily common stock
of a specifically listed company or for its corresponding index, from 01/01/2000 to
16/01/2016.
It should be noted here that in the Chinese market, there is dual share (30 dual
shares for upgrading and 23 dual shares for downgrading in our sample), which
makes an event could have double impact on both continental Chinese market and
Hong Kong market segment separately.
Table 1. General description of sample
Total Non-Contaminated Sample China France
UP DOWN UP DOWN
Number of series
282 141
110 158
Event Number 252 118
Before 31 33 39 61
Crisis After 251 108 71 97
Between 6 23
We fixed our estimation window at [-115,-15) for a period of 100 days and event
windows [-15, +15] for 31 days (including event day), under which there are also
some sub-windows to test results (Figure 1).
Figure 1. Window description
Finance and Banking 161
Chinese individual share investors are famous for their speculative spirit. Instead
of investing in the value of a listed company, they care more about price
differences in a short-term, which makes it probable for them to be more sensitive
to financial information circulated on the market. As an effect, we take a short
period for the event window and a relatively long period for an estimation window
but it also brings the worry of contamination.
As the comparative sample, we constituted same windows for the French market.
We are aware of the importance to expand the windows for a mature market as
indicated by several similar articles (Francois-Heude & Paget-Blanc, 2004;
Kenjegaliev et al., 2016).
The statistics described in the table are all non-contaminated in the meaning that
during the period of 131 trading days, we exclude events with other CRC(s)
happened during the estimation window as well as during the event window.
According to Followill and Martell (1997, p.81), it is important to “knowing the
precise timing of the arrival of event information” by “eliminat(ing) announce
events contaminated by extraneous, contemporaneous information events or
events proceeded by the announcement by the other major rating agency.”
We should admit that without the control of concurrent sovereign rating(s)
influence and other possible financial release or reports, our non-contaminated
sample may be still contaminated to some extent. A necessary adjustment should
be made to avoid the problems in the following study.
In order to get Abnormal Returns (ARs), Average Abnormal Returns (AARs) and
Cumulative Average Abnormal Returns (CAARs), we use following formulas:
Firstly, by using daily common stock price for both market (Pm) and individual
equity (Pi), we get Rmt and Rit on day t respectively:
Rit = Ln (Pi,t / Pi-1,t) (1)
with Rit: actual common stock return observed for individual equity i on day t.
Rmt = Ln (Pm,t / Pm-1,t) (2)
with Rmt: market return on day t, where we take three separated indexes (obtained
from Bloomberg) as market reference: SHASHR index and SZASHR Index for A
shares listed in Shanghai Stock Exchange and Shenzhen Stock Exchange
respectively; HSML100 Index for Chinese companies listed in H share segment in
Hong Kong. The reason to choose them instead of the others is that these indexes
compound the largest sample of companies in each listing place.
Secondly, under the 100-days estimation window, we have 100 Rit and 100
corresponding Rmt .With the help of SPSS (by the function of “simple regression”),
we could get two coefficients from the equation:
Rit = αi + βi * Rmt (3)
162 Strategica 2016
Then, we calculate Rnt (expected return for each stock i on day t during event
window(s) [p,q]) by market model:
Rnt= ̂ i + ̂ i * Rmt (4)
with ̂ i and ̂ i obtained above by equation (3)
We could get AR by
AR=Rit - Rnt (5)
with AR: difference between return observed in reality and return expected by
stock investors.
Figure 2. Calculation of AAR and CAAR
On a certain day t, AAR and SAAR (standardized average abnormal return) are
calculated by the following equations:
AAR t = Sum (AR1t : AR it)/N N
(6)
SAAR t = AAR t / S(AAR)t AR
i1
it /N (7)
With S(AAR)t= STDEV (AAR1t : AAR it )/ N (8)
CAAR are related to testing windows. Taking a random period of [p,q] from the
total 31 days of the event (Figure 2), we have:
q
CAAR= [1<=p,q<=31] (9)
AAR
t p
t
The T-test follows the same spirit previously and we used SPSS to facilitate the
calculation.
Finance and Banking 163
Results presentation
General results for Chinese market
The results of tests are split into two tables by type of CRCs: upgrades (282 series)
– Table 2 – and downgrades (141 series) – Table 3.
Table 2. General results for upgrades
Day AAR t p value Significance
-5 -0.31% -3.09 0.22% ***(-)
-2 -0.12% -0.74 46.14%
-1 -0.36% -2.42 1.61% **(-)
0 -0.15% -1.08 28.11%
1 0.13% 0.65 51.60%
2 0.02% 0.17 86.79%
Pre-window CAAR t p value Significance
[-5, 0] -1.07% -2.66 0.82 ***(-)
[-2,-1] -0.47% -2.02 4.43% **(-)
[-2,0] -0.61% -2.10 3.64% **(-)
[-1,0] -0.49% -2.21 2.78% **(-)
Post-window
and Around No significance
window
*,**,*** indicate respectively, 10%, 5%, 1% level of significance (two-tails tests) to see if the results
are significantly different from 0. Idem. Supra.
Table 3. General results for downgrades
Day AAR t p value Significance
-2 -0.49% -2.49 1.4% **(-)
-1 -0.01% -0.04 96.5%
0 0.41% 2.02 4.5% **(+)
1 -0.28% -1.27 20.7%
2 0.44% 2.37 1.9% **(+)
Pre-window CAAR t p value Significance
[-2,-1] -0.49% -1.81 7.3% *(-)
[-2,0] -0.08% -0.26 79.9%
[-1,0] 0.41% 1.57 11.9%
Post-window CAAR t p value Significance
[0,1] 0.13% 0.44 65.9%
[0,2] 0.58% 1.74 8.4% *(+)
[1,2] 0.16% 0.66 50.9%
Around window No significance
164 Strategica 2016
Both upgrades and downgrade proved the validation of WRH, put forward among
others, by Abad-Romero & Robles-Fernandez (2006 & 2007) for the Spanish
market. More specifically, there is negative anticipation with significance on the
day before the event (t-1) for upgrades.
There was truly a short negative reaction before the event of downgrades, but the
market corrected their behaviors very quickly afterward. For the date of the event,
investors reacted positively to the bad information and the effect lasted only
shortly to t+2.
Results for French market
The results on French market is more predictable, based on general results of CRCs
present in theory and in literature, with no significance for upgrades and negative
significance for downgrades, thus the SH is valid.
The study of Francois-Heude and Paget-Blanc (2004), covering the relatively short
period (01/01/2001 to 31/05/2003) showed significant negative CAARs before
the downgrading and positive CAARs after the event. We did find CAARs in the
same direction under the same event period (Table 4), but our effect does not last
as long as theirs does, nor was significance observed for the post-event.
Table 4. Results on French market
Up AR (100) - No significance
Down AAR(158) t test p value Significance
-2 -0.10% -0.48 63.10%
-1 -0.44% -1.97 5.04% *(-)
0 -0.17% -0.71 47.79%
1 -0.33% -1.67 9.76% *(-)
2 -0.25% -1.29 19.81%
CAAR t test p value Significance
[-1,0] -0.62% -1.73 8.56% *(-)
[0,1] -0.51% -1.55 12.33%
[-1,1] -0.95% -2.27 2.48% **(-)
[-2,2] -1.30% -2.47 1.47% **(-)
From the point of view of methodology, our event window was not long enough,
compared to other studies on mature markets, to examine significance around the
window (-30 to 30 day), which left an improvement in the future.
Result breakdown on Chinese market pre/post crisis
The breakdown of general results (Figure 3) brings us to the second interest of our
comparative study inspired by Dardour (2008): an examination of the market
reaction to the crisis (2008).
Finance and Banking 165
Figure 3. Reaction of Chinese investors in front of upgrades pre/post crisis
The behavior of investors remained similar in the case of upgrades. If we change
the “after curve” slightly with one or two-day delay (Figure 4), we may observe
that the modified “after curves” correspond very plausibly to the “before curve” for
the window [-7, 7] around the event.
With one With two-
day delay day delay
Figure 4. Modified “after curve” with one or two-day delay
Once separating the sample, significant ARs were observed for both periods in the
case of downgrades (Figure 5).
Figure 5. Reaction of Chinese investors in front of downgrades pre/post crisis
166 Strategica 2016
From the market standpoint, investors’ behaviors changed totally from one
direction to the other. They perceived downgrades as “bad news” for window [-2,
3] while after the breakout of crisis (2008), the WRH was confirmed for the
window [-4, 2].
Result breakdown on French market before, after and during crisis
There are significant positive reactions to upgrades independently to a period of
time (Table 5). The only difference is that investors delayed their reactions with
the time going as if they started to wait for other confirmation to the rating
information.
Table 5. Results for upgrades before, after and during crisis
Before AAR(39) t test p value Significance
-2 0.35% 1.41 16.62%
-1 0.06% 0.19 85.35%
0 0.47% 2.01 5.19% *(+)
1 -0.19% -0.71 48.22%
2 -0.06% -0.16 87.24%
After AAR(71) t test p value Significance
0 0.07% 0.37 70.94%
1 -0.05% -0.25 80.47%
2 0.38% 1.93 5.76% *(+)
Between 01/09/2007
AAR(6) t test p value Significance
and 01/01/2009
0 0.77% 1.05 34.02%
1 1.39% 3.02 2.94% ***(+)
2 -1.11% -1.66 15.81%
As for downgrades (Table 6), significant negative informative impacts were
expected only before and during the crisis (we chose the same period as did by
Kenjegaliev et al., 2016). After 2008, investors stopped to take this kind of
information seriously.
Table 6. Results for downgrades before, after and during crisis
Before AAR(61) t test p value Signification
-2 -0.01% -0.03 97.83%
-1 -0.47% -1.26 21.34%
0 -0.92% -2.25 2.83% **(-)
1 -0.38% -1.24 21.98%
2 -0.19% -0.56 57.54%
CAAR t test p value Signification
[-5,0] -1.68% -2.32 2.37% **(-)
[-1,0] -1.39% -2.40 1.95% **(-)
[0,1] -1.30% -2.54 1.36% **(-)
Finance and Banking 167
[-2,2] -1.97% -2.52 1.45% **(-)
[-1,1] -1.77% -2.85 0.59% ***(-)
After AR (97) - no signification
During AAR(23) t test p value Signification
-2 0.37% 0.57 57.24%
-1 -1.62% -1.82 8.29%
0 -2.29% -2.43 2.36% **(-)
1 -0.77% -0.99 33.38%
2 -0.08% -0.17 86.77%
CAAR t test p value Signification
[-4,0] -4.71% -3.23 0.39% ***(-)
[-1,0] -3.90% -2.82 0.99% ***(-)
[-1,1] -4.68% -3.02 0.63% ***(-)
July of 2011 marked two events during European Debt Crisis: European Union
decided to help Greece for the second around (German and France are main
creditors) and ESMA became the sole regulator for CRAs in Europe. Hence, we split
the results but found no special significant reaction after the new regulatory
regime, which “mean that a consistent effect [...] is not discernible” in the line of
Alsakka (2015, p.275).
Descriptive analysis of CRAs’ behaviors
There are some conceptual speculations about over-positive ratings on the Chinese
market, claimed by Kennedy (2003) among others. The kind of judgment reflects
an awkward situation of rating industry at the present moment where the
reputation mechanism is far too weak and the competition is not healthily
established.
The situation is clarified by following migration tables.
168 Strategica 2016
Table 7. Migration of local ratings for upgrades
Table 8. Migration of global ratings for upgrades
To be detailed, Chinese local CRAs (Lianhe, Chenxin, Dagong, SBCR, among others)
issued three times more upgrades than global CRAs (Big Three: Moody’s, S&P and
Fitch). All changes for local upgrades (with one exception) went from aa- and the
initial ratings were above investment grade while for the migration of global
upgrades, all changes are below aa-. In addition to that, local CRAs do not spare
more than one-notch-increase; however, this kind of actions is rare to see for
global CRAs.
Finance and Banking 169
Table 9. Migration of local ratings for downgrades
Table 10. Migration of global ratings for downgrades
It is interesting to see the global CRAs issue more downgrades than local CRAs, on
contrast. The latter had fewer changes below investment grade than their global
170 Strategica 2016
counterpart did, but they did not hesitate to downgrade an issuer or their issues by
several notches for one modification, as long as ratings dropped to a low level
(speculation grade). “Big Three” seemed more careful and chose to take a notch
down for a single time more often.
As for French market, European Medium-Small CRAs haven’t had chances to access
to rate publicly listed companies and S&P issued more than half of ratings,
followed by Moody’ and Fitch in terms of rating numbers.
Additionally, EJR had an important increase in recent years (2011). The same
situation happened also in China for CCRC (since 2014), which is famous for their
investors-pay models.
Conclusion
After the event study with the market model, we found WRH valid for the Chinese
market and SH valid for the French market. Chinese investors took downgrades as
“bad news” before the crisis and “good new” afterward while French investors
started to take them as “no news” after the crisis, which is new phenomenon
considering the before and during the period.
The third evidence of the paper showed that local CRAs, compared to “Big Three”,
are systematically more generous in giving better ratings. There is an additional
fast increase of market share of CRAs adopting investors-paying models in our
sample for both Chinese and French market.
As for perspective, we are going to extend the study scope in the following
research and to include more European countries. The first step is to see if the
results obtained in France could be generalized in the entire continental Europe.
The second step is to apply the methodology to the United Kingdom, and
eventually to Eastern and Central Europe, in order to have a relatively complete
version of intra-European comparison and to compare the results better with
Chinese market, not only from the institutional market environment, rating
regulatory regime but also from the level of market development.
Technically speaking, the classic methodology needs to be developed and we are
perfecting the coding skill for software R to facilitate calculation process. Finally, a
detailed analysis of CRAs' organizational and operational strategies should be
improved, which could help us to understand the infor-mediary from both outside
(investors and issuers) and inside of the organization.
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174 Strategica 2016
INVESTORS’ BEHAVIOR: THE CASE OF MUTUAL FUNDS IN
HUNGARY
Florentin Gabriel TUDORACHE
Bucharest University of Economic Studies
6 Piata Romana, Sector 1, 010374 Bucharest, Romania
gabriel_tud@yahoo.com
Luminiţa NICOLESCU
Bucharest University of Economic Studies
6 Piata Romana, Sector 1, 010374 Bucharest, Romania
luminicolescu@yahoo.com
Abstract. The performance of financial markets can be looked at in different
countries by analyzing the evolution of mutual funds, in terms of their inflows and
outflows. Individually, investors base their acquisition decisions on past
performances of funds and have the tendency to invest in funds that had previously
very good performances. A large number of studies, most of them conducted in the US
illustrate that mutual fund flows depend on the previous performance of funds and
that a common behavior of investors is to rather invest asymmetrically in highly
performing funds than to give up the funds that perform poorly. This paper studies
the flows of mutual funds in Hungary by looking at inflows and outflows of capital for
the period 2007-2014. The main purpose is to characterize the behavior of the
investors in the emerging Hungarian capital market, mainly in terms of their
investment choice. The paper also envisages recognizing if and how the financial
crisis, as part of the studied period, did affect the behavior of Hungarian investors.
The main findings of the research illustrate that there are a number of factors that
have a say in the way investors make their decisions. Among those fund flows in the
previous month is the factor that influences the most the current flows, illustrating
that Hungarians invest only in funds that attracted previously more new money.
Other factors with a significant influence on the investors’ behavior are the size of the
fund (measured through the net assets) and the risk (measured through the standard
deviations of returns. The factor that surprisingly seems to have less influence on
Hungarian investors’ decisions is the performance either measured as the evolution
of the fund category or the rank and the square rank of the fund in its category.
Another important finding was that data proved that the financial crisis had an
impact on the capital market in Hungary, as investments decreased in that particular
period and performances were lower.
Keywords: mutual funds; Hungary; financial portfolio performance; emerging
markets.
Finance and Banking 175
Introduction
This paper provides a complex examination of the evolution of money flows in
open-ended mutual funds in Hungary, as an emerging capital market. The paper
offers new insights in the emerging markets from Central and Eastern Europe, as
there is scarce literature in the field and none of it considers all funds categories.
The analysis is used to characterize the investors’ behavior in different mutual
fund categories in Hungary. The period of the research 2007-2014 is also
considered to identify influences on investors’ behavior given the studied period
characterized by economic distress at the global level. The data collected is used to
make a detailed and thorough analysis of the Hungarian mutual funds market in
which each fund category is looked at globally, but also considering the first 25%
most performing funds and the last 25% least performing funds in each category.
Investors’ behavior is characterized accordingly.
Literature review
The flow of capital that pours into mutual funds was a subject of interest for many
authors who studied the capital markets (Ferreira, Keswani, Miguel & Ramos,
2012; Ivkovic & Weisbenner, 2009; Sapp & Tiwari, 2004). One of the main topics
encountered in the literature is the flow-performance relationship. Numerous
studies that looked at how flow depends on past performance focused on US
market (Gruber, 1996; Ippolito, 1992) and most of them envisaged the US equity
market alone (Fu, Navone, Pagani & Pantos, 2012; Kim, 2013; Li, 2013). Others also
looked at other countries as well, either developed countries (Ferreira et al. 2012)
or developing countries (Varga & Wengert, 2010; Varga, 2011). Very few studies
were found for emerging markets from Central and Eastern Europe (Tudorache,
Nicolescu & Lupu, 2015).
One of the main findings of these studies relates to the convexity of the flow-
performance relationship. A convex relationship exists when flows are highly
dependent on past performance, but investors chase the most performing funds
more intensively than they sell a fund that performs poorly (Fu et al. 2012). Even
though this is a largely encountered phenomenon, there are differences in its
intensity in different circumstances. For instance, Ferreira et al. (2012) found that
convexity in less developed countries is much higher than in developed countries
and this relates to the level of sophistication and financial knowledge of the
investors. Kim (2013) found that the shape of the flow-performance relationship
changes over time, according to market and industry conditions, possibly from
being convex to being concave. He found that in the US the flow-performance
relationship that was convex prior to 2000 is no longer convex after 2000, due to
the market volatility on the one hand and to a higher level of information of the
investors on the other hand.
Another aspect that appears frequently in the literature about flows in financial
markets is the “smart money effect”. This term has been first introduced by Gruber
(1996) and Zheng (1999) and it describes the situation in which funds that receive
new money, also obtain abnormal returns. The “smart money effect” was
encountered for equity funds (Li, 2013), but was considered to be short lived. The
176 Strategica 2016
smart money effect is present in the case of bond funds as well, as illustrated by
Fulkerson, Jordan and Riley (2013) and Chen and Qin (2015), who found evidence
that the persistence of fund performance combined with return-chasing behavior
determines the predictability of fund flows.
Such aspects contribute to characterizing both the investing behavior of individual
and institutional investors, as well as the evolution of mutual funds, and as it was
presented, they applied to different countries. The present paper conducts an
analysis of some of these aspects for Hungary.
Data and methodology
This paper studies the evolution of the open-ended mutual funds from Hungary.
Data collected included the unit value of the funds and their returns as a
measurement of mutual funds’ performance, as well as data about their net assets
as a measurement of the size of the funds. The data on mutual funds was drawn
from BAMOSZ (The Fund Managers’ Association from Hungary). BAMOZ has 23
members (investment management companies) who administer collectively 581
mutual funds. The data collection period was January 2007 to December 2014. All
the investment funds marketed in the Hungarian capital market were studied, with
the exception of funds managed by foreign societies. A mutual fund was included in
the study only if it had at least 12 monthly observations that would allow the
calculation of performance. There were collected monthly data for both the total net
assets and the fund unit value. Data has been grouped into five categories according
to the classification of the mutual funds on different types of funds: “monetary
funds” (46),” bond funds” (52), “equity funds” (126), “mixed funds” (45) and “other
funds” (125). The final sample for Hungary included 394 investment funds.
The relationship between the fund flow and performance was studied with the
following regression:
where i counts the funds we analyzed and t stands for the moment in time for each
observation.
The explanatory variables are:
LnTNAi,t-1= logarithm of the net assets (size of the fund) in the previous month
STDi,t-1= standard deviation of returns in the previous month
FLOWi,t-1= flow of new money in the previous month
FLOWCATs,t-1 = growth in percentage of the new money of the entire fund category
RKi,t-1 = rank in the fund category it belongs to
SQRKi,t-1 = square of the rank in the fund category it belongs to
These regressions were performed for each fund according to its particular
category. A twelve-month rolling interval held in order to compute the yearly
values for all the explanatory variables. The length of the time interval for each
fund varied depending on the length of the existence of each fund in the analysis.
There were performed 394 regressions that studied how the independent
Finance and Banking 177
variables (LnTNAi,t-1; STDi,t-1; FLOWi,t-1; FLOWCATs,t-1; RKi,t-1; SQRKi,t-1) influenced
the dependent variable, namely the fund flow in the current period (FLOWi,t). The
results of the regressions are presented in the following section.
Empirical results
This section presents the results of the 394 regression run for all five categories of
mutual funds in Hungary for the period 2007-2014.
P-value
In order to validate the statistical hypothesis, we applied the F-test to test the null
hypothesis. P-values have been calculated for the overall regression and for all
seven variables of the regression. Figure 1 presents the P-value for the five
categories of funds analyzed.
P-values across categories Hungary
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 1. P-value of the regressions for the five categories of mutual funds from
Hungary, 2007-2014
For the “equity funds” category, the null hypothesis is rejected for 121 of the 126
equity funds, illustrating the validity of the regression with a 95% probability.
There are only five equity funds from the total of 126, for which the regression is
not verified, as they have P-values higher than 0,05.
The “other funds” category had nine funds out of 125 for which the regression did
not verify and the “mixed funds” category had only one fund out of 45 for which
the regression did not verify. In conclusion, we can state that the results illustrate
on overall that the regression is valid for a large part of the mutual funds (379 out
of the total of 394) and the chosen independent variables explain the evolution of
the flow.
178 Strategica 2016
The determination coefficient R2
In a regression when the differences between the observed values and the
forecasted values are very small and random, it can be stated that the model has
been chosen correctly. The determination coefficient (R2) measures statistically
how close are the real values from the values calculated based on the regression
model.
As it can be noticed in figure 2, the median of the R2 for the “equity funds” category
is 0,842, a value close to 1 that illustrates the validity of the regression. The validity
of the regression is also re-confirmed by the fact that three-quarters of the equity
funds had high values of the P-values that surpass the values of 0,732. The
“monetary funds” category had similar values with the “equity funds” (the median
was 0,868 and three-quarters of the funds had values of R2 over 0,733).
The determination coefficients for the other categories of mutual funds had better
values: the median of R2 for “other funds” was 0,912, the median of R2 for “mixed
funds” was 0,930 and the median of R2 for “bonds funds” was 0,915, all values very
close to 1. It can be concluded that the determination coefficient R2 restates that
the regression equation explains to a large extent the dependent variable, the flow,
for most of the open-ended funds in Hungary.
R squared across fund categories Hungary
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 2. The determination coefficient R2 for the five categories of mutual funds from
Hungary, 2007 – 2014
The regression coefficients of the independent variables
Figures 3 – 8 present the significant values of the regression coefficients for the
independent variables and the percentage of funds for which, each independent
variable is significant at the level of each fund category among the five categories
in which are grouped the 394 mutual funds studied in Hungary. For each variable
are presented three graphs: the first graph is a graph that illustrates the general
relationship between the flows and each independent variable; the second graph
presents the same relationship but for the last 25% the least performing funds
Finance and Banking 179
(based on returns) and the last graph presents the relationship for the first 25%
the most performing funds in each category.
β1 The logarithm of total net assets in the previous month (LnTNAi,t-1)
The percentage for which this coefficient is statistically significant varies between
18%-29% for all five categories of funds, a relatively small percentage, but still
important. Figure 3 presents the three graphs for β1.
-3
x 10Significat Beta LnTNA(t-1) coefficients across categories Hungary
0
-5
-10
-15
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta LnTNA(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Last 25% Beta LnTNA(t-1) coefficients across categories Hungary
0.01
-0.01
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta LnTNA(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First -9
x 1025% Significatn Beta LnTNA(t-1) coefficients across categories Hungary
8
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta LnTNA(t-1) coefficients Hungary
0.8
0.6
0.4
0.2
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 3. The coefficients of regression β1 the logarithm of total net assets in the
previous month (LnTNAi,t-1) for all fund categories in Hungary, 2007-2014
180 Strategica 2016
For the “bond funds” category there were 18% (9) of the funds that had a
significant relationship between flows and the logarithm of total net assets in the
previous month and for most of them (8 out of 9) the relationship was negative
illustrating that a decrease in the net assets in the previous month leads to an
increase in flows. At the first glance, this can be interpreted as an irrational
behaviour of the Hungarian investor, but if we consider the fact that the studied
period was characterized by economic turmoil, the results can indicate the fact
that many investors prefer to shift from high-risk funds toward low-risk funds,
even when those low-risk funds are decreasing in size. In a similar situation were
also the “other funds” for which 24% of the funds (30 out of 124) had a significant
relationship between the two variables and its direction was rather negative (22
negative β1).
For the other categories of mutual funds (monetary funds, mixed funds, and equity
funds) the significant relationships were both positive and negative in relatively
equal proportions, therefore there was no clear direction of the influence between
the two variables.
For the last 25% least performing funds (based on returns), the high-risk funds
(equity funds, mixed funds, and other funds) presented relationships of
dependency that were both negative and positive, without having a majority
direction. For the low-risk funds very few of the underperforming funds had a
significant relationship among the two variables, illustrating that the size of the
fund was not in an influencer for investors in case of poorly performing funds.
For the first 25% the most performing funds (based on returns) it can be noticed
an increase in the percentage of funds for which the relationship is significant for
β1. For instance, for “mixed funds” , for the most performing funds 50% of them
had a significant relationship between variables, as compared to 18% for the
whole category. Most of those expose o positive relationship, illustrating that an
increase in the net assets of the fund determines and increase in flows. The
situation is similar for “monetary funds” as well. This illustrates that in the case of
funds with good performances the investors’ behavior is more sensitive to the size
of the funds, chasing funds that increase in size.
β2 The standard deviation of returns in the previous month (STDi,t-1)
For 85 of the 394 open-ended investment funds studied in Hungary, the standard
deviation of returns in the previous month (STDi,t-1) is a significant influencing
factor, as presented in figure 4. It is to be noticed that the only fund category for
which the relationship between the flow and standard deviation of returns in the
previous month is positive for most of the funds is the “monetary funds” category,
that had 11 funds with positive relationships among the 12 funds for which β2 was
different from zero (out of the total of 46 monetary funds). This illustrates a higher
volatility of the “monetary funds” to the movement of interest rates, that registered
large decreases in the period of financial distress when Central Banks tried to re-
launch economies by offering capital at low cost.
For the “equity funds” category there were 23 funds for which the two variables
had a significant relationship, most of them being positive (17), illustrating that at
Finance and Banking 181
higher risks, the flows increased, probably for those investors who hoped that the
direction of change in the returns will be in their favour and they were willing to
take higher risks. The other fund categories (bonds funds, mixed funds, and other
funds) with significant relationships of β2 had no clear directions of the
relationships.
For the first 25% most performing funds in most fund categories it was noticed a
slight increase in the number of funds with values of β2 significant, with the
exception of “bonds funds”. For the last 25% least performing funds it was
registered a large decrease in the percentages of funds with significant
relationships as compared to the whole category (from 18% to 6% for “equity
funds” and from 18% to 9% for “mixed funds”).
As a first observation, it can be noticed that the flow of the open-ended investment
funds in Hungary is more sensitive to the standard deviation of returns in the
previous month for the first 25% most performing funds and insensitive to the
standard deviation of returns in the previous month for the poorly performing
funds. This explains the behavior of the Hungarian investor who for the
performing “equity funds” takes more risks and increases the acquisitions for
these funds based on the large differences in the returns registered in the previous
month, with the chance of obtaining large gains if the differences are in their favor.
The same type of behavior is met for “mixed funds”, another high-risk fund
category, while for the “bonds funds” the behavior is reverse.
A second observation relates to the fact that for the”bonds funds” category on
overall β2 has balanced positive and negative values, while for the 25% the least
performing funds, the values are mostly negative. This means that for “bonds
funds”, the Hungarian investors tend to acquire less of these funds when the risks
increase.
4
x 10 Significat Beta STD(t-1) coefficients across categories
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta STD(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
182 Strategica 2016
4
x 10 Last 25% Beta STD(t-1) coefficients across categories Hungary
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta STD(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First 25% Significatn Beta STD(t-1) coefficients across categories Hungary
4000
2000
-2000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta STD(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 4. The coefficients of regression β2 the standard deviation of returns in the
previous month (STDi,t-1) for all fund categories in Hungary, 2007-2014
β3 Flow of new money in the previous month (FLOWi,t-1)
The flow of new money in the previous month is the predictor with the highest
level of significance among all independent variables included in the present
regression. See Figure 5.
Significat Beta FLOW(t-1) coefficients across categories
10
-5
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOW(t-1) coefficients Hungary
1
0.5
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Finance and Banking 183
Last 25% Beta FLOW(t-1) coefficients across categories
10
-5
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOW(t-1) coefficients Hungary
1
0.5
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First 25% Significatn Beta FLOW(t-1) coefficients across categories
0.5
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOW(t-1) coefficients Hungary
1
0.5
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 5. The coefficients of regression β3 flow of new money in the previous month
(FLOWi,t-1) for all fund categories in Hungary, 2007-2014
All β3 with a significant relationship had positive values, illustrating that the flows
in the present month are very sensitive to the flows variations in the previous
month. The highest level of statistical significance it is encountered in the case of
“mixed funds” for which 93% of the funds had a significant relationship between
present flows and flows in the previous month.The “bonds funds” category had the
β3 significant for the lowest percentage of funds (80%), but still at a high level.
Looking at the two groups of funds for all fund categories on overall, it can be
observed that for the first 25% most performing funds the regression coefficients
are statistically significant for percentages comprised between 92% and 100%. For
the last 25% least performing funds, the degree of significance of the relationship
decreases, as the percentage of funds for which the relationship is statistically
significantly varies between 83% and 53%, much lower values. It can be concluded
that the statistical significance of the regression coefficients increases up to 100%
of the funds for good performing funds, suggesting a sensitivity of the flows to the
performances of funds. This illustrates that the Hungarian investor is willing to
invest in the most performing funds that were appreciated in the past as well.
β4 Growth in percentage of the new money of the entire fund category in the previous
month (FLOWCATs,t-1)
The growth in percentage of the new money of the entire fund category in the
previous month (FLOWCATs,t-1) is a factor with little statistical significance for
184 Strategica 2016
the fund categories “equity funds”, “mixed funds” and “monetary funds”, as the
percentage of funds for which β4 is significant was comprised between 5% and
11%. The funds for which β4 is significant increases for “bonds funds” (at 25% of
all bond funds) and for “other funds” (31% of all other funds). See Figure 6.
The significant regression coefficients for the “other funds” category are mostly
negative (30 out of 39 with a significant relationship), with similar results for both
the first 25% most performing funds and the last 25% least performing funds. As
far as the “bonds funds” are concerned, it can be noticed an increase in the
percentages of funds with a significant relationship when we analyze the two-
quarters, the superior and the inferior quarters in terms of performance, reaching
35% and respectively 38%, as compared with the percentage of funds for which β4
is significant for the whole category (25%). We also identified a difference in the
signs of the coefficients from the two-quarters: in the superior quarter, the
coefficients are mostly negative (4 negative and one positive), while for the last
quarter the situation is mixed (3 positive and 2 negative). For “bond funds” an
increase in the percentage of new money of the entire fund category, leads to a
decrease in the present fund flow or said in another way the investors invest more
in this fund category when there is less capital invested on overall in these funds.
This can be related to the movement of capital from high-risk markets to low-risk
markets, even when those low-risk markets decrease.
At the same time, for the first 25% most performing funds from “mixed funds” and
“monetary funds” categories, there is an increase in the number of funds for which
β4 is significant (33% of the total of “mixed funds” and 23% of the total of
“monetary funds”). The relationships are rather positive illustrating that the
growth in the percentage of the new money of the entire fund category, influence
in a positive manner the present flow for that fund category.
For the “monetary funds” category the relationship is the other way around: an
increase in the percentage of the new money of the entire fund category in the
previous period leads to an increase in the present flow. This illustrates that
investors in Hungary take into consideration the previous behavior of other
investors when they acquire a new unit of monetary funds, influencing each other.
The growth in the percentage of the new money of the entire fund category in the
previous month, attract new investments in these funds, especially for those with
high performances. A possible explanation could be that the Hungarian investor
informs himself about the previous evolution of “monetary funds” and takes
decisions based on this.
To conclude, we can state that at a general level β4 the growth in percentage of the
new money of the entire fund category in the previous month (FLOWCATs,t-1), is
statistically significant for a relatively low number of funds (maximum 31% for
whole categories and maximum 38% for quartiles in the categories), illustrating
that only for these funds the flows are influenced by the growth in percentage of
the new money of the entire fund category in the previous month. For most of the
funds, the influence of this factor is low.
Finance and Banking 185
β5 Rank in the fund category it belongs to (RKi,t-1)
As presented in Figure no. 7 the regression coefficient β5 the rank in the fund
category it belongs to it is not significant for 92% of the funds in the “equity funds”
category and for the ten funds for which the relationship is significant, the
relationships are balanced (5 positive and 5 negative). A similar situation is
encountered in the case of “other funds”. The only two categories of funds for
which there is a higher level of significance are “mixed funds” (24%) and
“monetary funds” (30%).
Significat Beta coefficients FLOWCAT(t) across categories Hungary
0
-500
-1000
-1500
-2000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOWCAT(t) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Last 25% Beta coefficients FLOW CAT(t) across categories Hungary
0
-500
-1000
-1500
-2000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOW CAT(t) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First 25% Significatn Beta coefficients FLOWCAT(t) across categories Hungary
200
-200
-400
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta FLOWCAT(t) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 6. The coefficients of regression β4 Growth in percentage of the new money of the
entire fund category in the previous month (FLOWCATs,t-1), for all fund categories in
Hungary, 2007-2014
186 Strategica 2016
An increase in the rank of a monetary fund in its category in the previous period
determines an increase in the present flow, as most of the β5 were positive. For the
“bonds funds,” the relationship is significant for 17% of the funds with a positive
direction, illustrating that flows increase with an improvement of the rank of a
fund in its category.
In the case of the first 25% the most performing funds, it can be stated that the
significance of β5 increases for all funds categories. Interesting results are
encountered in the case of “monetary funds” for which β5 shows a significant
relationship for 36% of the funds (increased as compared to the 30% of the whole
category). Similarly for the “bonds funds”, β5 indicates a significant relationship
for 21% of the most performing funds as compared to only 17% of the whole fund
category. The sign of β5 is positive illustrating again that a better rank in the
category leads to an increase in flows. This is more prominent in the case of the
low-risk funds as compared to high-risk funds.
For the last 25% the least performing funds, the “mixed funds” category is to be
remarked as the percentage of funds for which the relationship is significantly
increased from 25% for the whole category to 45% for the least performing funds
with mixed signs for β5. This illustrates that the investors who operate with less
performing funds (the last 25%) are more proactive in selling and buying fund
units according to their rank in the category, in comparison with investors who
buy units of “mixed funds” in general. In the case of “monetary funds,” the situation
is reverse as β5 indicates a significant relationship for only 8% for the least
performing funds, as compared to the 30% funds with the significant relationship
for the whole fund category. This would suggest that in the case of less performing
“monetary funds”, the rank in the category is not an influential factor in the
acquisition decision of the investors.
β6 Square of the rank in the fund category it belongs to (SQRKi,t-1)
The regression coefficients β6 the square of the rank in the fund category do not
differ a lot from the previous coefficient β5. For instance, β6 indicates that for the
“equity funds” the relationship is significant for only 9% of funds, showing that this
factor has a small influence on the evolution of flows. See Figure 8.
In the case of “monetary funds”, similar to β5, also β6 recorded a statistically
significant relationship for the highest number of funds (32%). The relationship is
rather negative (10 negative and 5 positive), meaning that flows increase with a
decrease in the square rank in the fund category. The Hungarian investor prefers
to move his money from high-risk funds towards low-risk funds, even when they
are less performing, just because they are safer.
Most of the Hungarian investors do not consider the rank of the funds in their
category and the square rank of the funds, when making investment decisions
(“mixed funds” 16%; “bonds funds” 16%).
Finance and Banking 187
For the last 25% least performing funds among “mixed funds”, the relationship is
significant for a higher number of funds (36% as compared to 22% for the whole
category), but with an unclear direction. In the case of “monetary funds,” the
significant relationships decrease from 32% for the whole fund category to 17%
for the least performing funds. This reaffirms that the factor is not taken into
consideration by the Hungarian investor when acquiring unit funds.
In the case of the first 25% most performing funds for the “monetary funds”
category the number of significant coefficients β6 are of 54% of all performing
funds (as compared to 32% for the whole fund category), without a clear dierction
of the influence (β6 coefficients: 4 negative and 3 positive). The results show that
the Hungarian investor is more proactive in taking investment decisions in the
most performing monetary funds. For the other categories of funds, there were no
large differences in the case of the first 25% most performing funds as compared
to the whole category, neither in the case of number funds for which the
relationship is significant nor in the case of the sign.
Conclusion
The analysis of the mutual fund market and behavior of investors in Hungary
based on the regression shows that the regression equation was valid for more
than 90% of all funds (based on p-values), illustrating an exiting influence of the
independent variables on the dependent variable (the flow). The coefficient of
determination R2 reaffirms that the regression equation explains to a large extent
the dependent variable and that it exists a strong relationship between the
variables. The analysis of the size of the fund expressed through net assets in the
previous month, lead to the conclusion that this factor is an influencer (for around
20-35% of all funds).
Significat Beta coefficients Rank(t-1) across categories Hungary
0
-1000
-2000
-3000
-4000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Rank(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
188 Strategica 2016
Last 25% Beta coefficients Rank(t-1) across categories Hungary
2000
1000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Rank(t-1) coefficients Hungary
0.8
0.6
0.4
0.2
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First 25% Significatn Beta coefficients Rank(t-1) across categories Hungary
-2000
-4000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Rank(t-1) coefficients Hungary
0.8
0.6
0.4
0.2
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 7. The coefficients of regression β5 Rank in the fund category it belongs to (RKi,t-
1), for all fund categories in Hungary, 2007-2014
The examination of the standard deviation of returns shows that the risk factor
influences the flows (for 21-22% of all funds) and that risk is an influencing factor
for the investors’ acquisition behavior. An atypical behavior of investors in
“monetary funds” was encountered in the sense that they invested more money in
the riskier “monetary funds”. At the first glance this might appear as being illogical,
however considering the period in which the study was conducted, a period of
economic unrest, an explanation can be that the financial crisis affected the
behaviour of the consumers, who preferred to shift their investment from high-risk
mutual funds towards low-risk mutual funds (such as monetary funds) in spite of
their lower performance and higher risk, just because the risk is lower than for
other categories of funds.
Finance and Banking 189
Significat Beta Squared Rank(t-1) coefficients across categories Hungary
2000
1000
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Squared Rank(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Last 25% Beta Squared Rank(t-1) coefficients across categories Hungary
-1000
-2000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Squared Rank(t-1) coefficients Hungary
0.4
0.3
0.2
0.1
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
First 25% Significatn Beta Squared Rank(t-1) coefficients across categories Hungary
2000
1000
-1000
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Percentage of Significant Beta Squared Rank(t-1) coefficients Hungary
0.8
0.6
0.4
0.2
0
Equity Funds Other Funds Mixed Funds Monetary Funds Bonds Funds
Figure 8. The coefficients of regression β6 Square rank in the fund category it belongs to
(RKi,t-1), for all fund categories in Hungary, 2007-2014
The fund flows in the previous month is the factor that influences the most the
current flows and investors from Hungary invest only in funds that attracted
previously more capital (new money).
The percentage growth of the fund category has a small influence on flows, this not
being an influencing factor for a large number of funds in Hungary (only two
categories of funds have it as an influencing factor for around 20% of the funds in
190 Strategica 2016
category). The Hungarian investor tends to invest in “bond funds” even when there
is less capital invested on overall in those funds, suggesting again that in spite of an
unfavorable evolution, low-risk funds are preferred in a period of economic crisis.
The rank and the square rank of funds in their categories are not very influential
factors for flows. The only fund categories for which fund flows increased with a
better position of the fund in the category were the low-risk funds (“bond funds”
and “monetary funds”). It seems that Hungarian investors pay attention to
performance in terms of position only for the investment that is safe, for which the
returns are guaranteed. This is also part of the tendency to shift from high-risk
funds to low-risk funds, due to the high level of uncertainty in a volatile market.
Such information related to the factors that influence investment behavior can be
used by asset management companies in their marketing activities and in
communicating with the investors. Information that is highly considered by
investors when investing (such as previous capacity in attracting new capital, the
size of the fund, the risk associated with the fund) are to be provided to investors
in order to attract them.
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Li, M. (2013). Mutual Fund Flows and Performance: A Survey of Empirical Findings.
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Varga, G., & Wengert, M. (2010). The Growth and Size of the Brazilian Mutual Fund
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192 Strategica 2016
REVISITING THE INFLUENCE OF REFORMED PENSION REGIMES
ON DOMESTIC CAPITAL MARKETS: 1990-2014
Maria Nela SEIJAS GIMENES
Universidad de la Republica
1926 Gonzalo Ramirez St., Montevideo, Uruguay
mseijas@ccea.com.uy
Juan Gabriel BRIDA OGRIZEK
Universidad de la Republica
1926 Gonzalo Ramirez St., Montevideo, Uruguay
juangabriel.brida@unibz.it
Abstract. Personal funded systems have experienced significant growth in recent
decades, following the trend of aging populations and crises in pension systems that
have affected all countries globally. The aim of this study was to determine whether
the implementation of these pension schemes has developed domestic capital
markets, as established by structural reforms. For this purpose, regression data
panels were constructed using indicators of depth and liquidity of stock and bond
markets as well as variables representing pension systems and other indicators of
development of financial markets in the period 1990-2014. The regressions also
considered the detected linkages between pension systems, using a methodology
based on clustering analysis and hierarchical tree statistical tools, following
representative statistical information of their performance. The results showed that
the seniority of the systems was relevant to explain the associations between them,
but not the mandatory or voluntary nature of systems nor their geographical
location. There were important sources of heterogeneity of the impact of pension
funds on capital markets. The analysis revealed that individual capitalization pension
schemes have meant a stimulus to stock market depth. Membership to a cluster
determined significant impacts of pension systems on capital market development
indicators. Stock markets depth and liquidity indicators received the positive impacts
of greater magnitude from those systems included in the intermediate gradual
maturation cluster. Pension schemes belonging to the low gradual and incipient
maturation cluster exerted significant incentive on public bond markets depth. The
high gradual maturation cluster was associated with substantial increases in stock
depth as well as public bond depth. On the other hand, the advanced maturation
cluster showed a positive impact on private bond depth, as well as systems with an
incipient maturation. A negative causality with stock market liquidity was also
evidenced for the incipient maturation cluster, which was linked to the long-term
profile of pension portfolio management that privileges funding strategies to trading
strategies.
Keywords: individual capitalization pension funds; capital markets; cluster analysis;
panel data regression; structural pension reforms.
Finance and Banking 193
Introduction
In 1981, Chile introduced structural reforms in its PAYG (Pay-as-you-go) social
security system, implementing a pure individual capitalization scheme. In 1994,
the World Bank released a book on pension reforms, titled “Averting the Old Age
Crisis: Policies to Protect the Old and Promote Growth”, which has been a seminal
work in this field. That document suggested that countries should adopt a
multipillar pension system, whose first pillar was comprised by a PAYG system –
or defined benefit system- and the second by an individual capitalization
mandatory system, which is a defined contribution scheme, where future pensions
are determined by contributions made by workers and the return generated by
them. The scheme could be even supplemented with a third defined contribution
pillar, consisting of voluntary contributions. That book included as an additional
objective, the hypothesis for the beneficial effect of capitalization systems on
domestic capital markets, that is, the deepening and development of domestic
capital markets, through the financing and decentralized control in the second
pillar. On the contrary, with PAYG systems, generally managed by governments,
there is no stimulus to capital markets, as these schemes are based only on
contribution transfers between active and passive workers. When institutional
investors replace PAYG systems, either partially or totally, managed assets grow as
pension systems mature, stimulating the investment and development of capital
markets.
Over the last two decades, in response to the demographic and fiscal pressures
that menaced the traditional PAYG systems, a significant number of countries
globally have closed their depleted public pension systems based on defined
benefits, towards defined contribution schemes.
Limited to our knowledge, literature related to the impact of funded pension
schemes on domestic capital markets mainly refers to technical reports of local or
international organizations related to these issues, comprising either country
assessments of pension systems or empirical research methodologies. In
particular, Ashok and Spataro (2013), Catalan, Impavido and Musalem (2000),
Davis and Steil (2001), Hryckiewicz (2009), Impavido and Musalem (2000),
Impavido, Musalem and Tressel (2001, 2003), Meng (2010) and Walker and Lefort
(2002) have produced research studies that apply statistical-econometric
methodologies that are considered significant references for this paper. An
important channel through which funded pension plans may affect financial
efficiency is promoting the development of domestic capital markets. The
academic literature recognizes that the stimulus for financial progress is the most
important positive externality that the introduction of funded pension schemes
can achieve. For example, Iglesias (1997) argues that the introduction of pension
funds lowers transaction and emission costs in the capital markets in which they
operate. Blommestein (1998) also states that the presence of strong institutional
investors’ environment is a prerequisite for the development of the capital
markets. Merton and Bodie (1995), Davis (2011) and Raddatz and Schmukler
(2008) argue that the growth of pension funds may increase the development of
the capital market through its long planning horizon term ability to attract and
shift resources to more productive activities. Giannetti and Laeven (2009) discuss
that the development of local pension funds in Sweden can provide a stimulus to
194 Strategica 2016
enhance domestic capital markets, especially bond markets. Hu (2012) finds a
strong link between Asian pension fund assets and stock market capitalization, as
well as a positive impact of pension funds on market liquidity in less developed
economies.
The aim of this paper was to analyze the impact of the introduction of funded
pension schemes on the development of domestic capital markets, in order to
verify one of the main objectives of structural pension reforms that were
implemented globally from the 90´s onwards. For this purpose, a total of thirty-one
personal individual capitalization systems, - twenty-five mandatory and six
voluntary- from countries located in South America, Central, Caribbean and North
America, Western Europe, Eastern Europe, Africa and Oceania, were selected. The
data consisted of stock markets depth and liquidity indicators, bond markets depth
indicators, variables representing the main characteristics of pension systems and
other explanatory indicators of the development of financial markets. The
methodological strategy employed included panel data regression and hierarchical
tree (HT) statistical tools as well as dynamic and static clustering classification
techniques.
The paper is organized as follows. Section 2 describes the data to be investigated in
this research. In section 3, the panel data regression methodological strategy and
the corresponding empirical results are detailed. Section 4 identifies the clustering
strategy of capitalization pension systems and its empirical results. Section 5
iterates the panel data regression methodology on each of the identified clusters
and results of the impact analysis of funded pension schemes on domestic capital
markets development are evaluated. In section 6 the main conclusions of the
investigation are reported, including the linkage of the funded pension schemes’
maturation stage to their impact on capital markets and their policy implications.
Description of data
The dependent variables in this study were related to domestic capital markets’
development, while the explanatory variables characterized funded pension
systems. Furthermore, as control variables, financial markets’ development
representative indexes, and general economic indicators were used.
Domestic capital markets
Market capitalization/GDP was used as a representative indicator of stock market
depth. In reference to the liquidity of the stock market, the analysis included Stocks
traded/GDP and the Turnover ratio, equivalent to Stocks traded/Market
Capitalization. Finally, fixed income market’ depth was measured through
Outstanding private bonds/GDP and Outstanding public bonds/GDP indicators, for
private and public bond markets, respectively.
Funded pension systems
In this work, Funded pension schemes/GDP measured the importance of
capitalization pension plans in domestic financial markets. According to the OECD,
Finance and Banking 195
this indicator provides information on the maturity of the system and highlights
the importance of individual capitalization pension funds in relation to the size of
the economy. In addition, other indicators of pension systems were used, which
relate to voluntary or mandatory schemes, seniority of the systems, the distinction
between pure, mixed or parallel capitalization systems and their geographical
location, among others.
Financial systems and general economic indicators
Finally, as variables that could affect both domestic capital markets and pension
systems, we considered the following set of indicators: a) Population ages 65 and
above (% of total); b) annual rate of inflation; c) GDP per capita (in dollars); d)
legal strength indicator; e) real interest rate; f) bank nonperforming loans to total
gross loans; g) interest rate spread and h) balance of payments’ current account to
GDP.
The universe of countries with individual capitalization personal pension systems
was determined according to the documents "Social Security Programs throughout
the World", elaborated by ISSA (International Social Security Association) and
"Private Pensions: OECD classification and glossary". Table I shows the year of
inception of each regime, the ISO code of the country, the attribute of mandatory or
voluntary and its type of design, whether a pure capitalization, mixed integrated or
mixed parallel pension fund, depending on its interactions with PAYG systems.
Annual data refer to the period between 1990 and 2014.
Table 1. Global review of capitalization pension systems (AIOS, AISS, FIAP, OECD)
Start ISO Mandatory/ Pure Mixed Mixed
Country
year Code Voluntary capitalization integrated parallel
Chile 1981 CL M X
Spain 1988 ES V
Australia 1992 AU M X
Peru 1993 PE M X
Argentina 1994 AR M X
Brazil 1994 BR V
Colombia 1994 CO M X
Czech Rep. 1994 CZ V
Uruguay 1996 UY M X
Bolivia 1997 BO M X
El Salvador 1998 SV M X
Hungary 1998 HU M X
Kazakhstan 1998 KZ M X
Mexico 1998 MX M X
Panama 1999 PA M X
Poland 1999 PL M X
Sweden 1999 SE M X
Ukraine 2000 UA V
Costa Rica 2001 CR M X
Latvia 2001 LV M X
196 Strategica 2016
Bulgaria 2002 BG M X
Croatia 2002 XR M X
Estonia 2002 EE M X
Honduras 2002 HN V
Kosovo 2002 XK M X
Russian 2003 RU M X
Federation
Dominican 2003 DO M X
R.
Lithuania 2004 LT M X
Slovakia 2005 SK V
Nigeria 2005 NG M X
Macedonia 2006 MK M X
Note: Pension systems are identified by the list of ISO codes for countries and territories
(ISO 3166: 1993)
Panel data regression methodology and empirical results
Measuring the potential impact of individual pension fund on domestic capital
markets was implemented by performing panel data regressions, controlling for
other characteristics of the financial system and the overall economy of each
country analyzed, in order to assess the levels of association and causality. Given
the differences between countries in the time of inception of structural pension
reforms, an unbalanced panel data set -with quantitative and qualitative
information on systems and markets- was built. Formally, the panel data
regression methodology is given by the following formulation:
y it xit z it i t it
where yit is the dependent variable to be explained, α is the constant of the model,
xit are the explanatory variables that describe features of pension systems, β are
the coefficients of those explanatory variables and z represents other financial
variables or macroeconomic indicators that may explain the development of
capital markets; µi are the unobservable individual effects, λt are temporary effects
and vit is the idiosyncratic error.
A suitable estimation strategy was determined by the implementation of the
Hausman test (1978) and the modified Wald test for heteroscedasticity. Following
Impavido et al. (2003), the capitalization pension schemes variable was included
with only one-year lag, in order to maximize the sample size. Using the
instrumental variables approach, the independent variable was instrumented in
turn through its second lag. Finally, estimates of the regressions were performed
with standard errors robust to heteroscedasticity and autocorrelation.
Finance and Banking 197
Table 2. Funded pensions schemes impact on domestic capital markets
Market Stocks Outstanding Outstanding
Dependent traded / Turnover
capitalization / private bonds public bonds /
variable ratio
GDP GDP / GDP GDP
Inflation (log) 3.7576 -.0341 1.636 -.0135 -5.554
(6.876) (.0283) (7.076) (.0084) (4.629)
Per capita GDP -3.0157 .0663* 7.461 .0268 .8768
(log) (6.422) (.0338) (7.219) (.0252) (7.124)
Real interest 1.66e-13 -5.38e- 7.95e-13 .0091 -5.38e-15
rate (7.72e-12) 15** (7.67e- (.0504) (4.59e-12)
(2.30e- 12)
15)
Legal strength -195.7666 -2.226* 69.046 -.8100 -73.773
indicator (239.140) (1.225) (267.467) (.5397) (252.694)
Interest rate -37.1784 .1269 -3.663 -.1732 -81.783
spread (55.273) (.3186) (63.285) (.2051) (62.667)
Bank 31.9686 -.4601 -15.404 .0398 .9010
nonperforming (70.158) (.3422) (72.872) (.0968) (48.711)
loans to total
gross loans
Current -.05055 -.0041 -.5744 -.00259 2.369***
account (.8805) (.00376) (.9314) (.0019) (.6827)
balance of
payments/GDP
Funded 117.8073*** .0450 -21.245 .1055 60.897
pension (27.379) (.1289) (31.998) (.0867) (39.997)
schemes/GDP
(lagged)
No. of 339 328 327 324 326
observations
No. of groups 30 30 30 30 30
R-sq: within 0.3747 0.3410 0.7586 0.5635 0.6196
R-sq: between 0.9883 1.000 1.000 1.000 0.7269
F test/Wald 52.87 10075.7 576.90 3542.31 54.10
test (0.000) 9 (0.000) (0.000) (0.000)
(0.000)
Notes: t-statistics based on estimations robust to heteroscedasticity and autocorrelation. The value of
the estimated coefficient is reported, indicating the standard error in brackets. All regressions include
year dummies. ***, **, *: 1%, 5% and 10% significance levels, respectively. According to the results of
Hausman and Wald’s tests, we used random effects model for Market Capitalization/GDP, Turnover,
and Outstanding public bonds/GDP while a fixed effects model was used for Stocks traded/GDP and
Outstanding private bonds/GDP. Funded pension schemes/GDP was instrumented through its second
lag. Source: Own elaboration using STATA.
Regression estimates results can be found in Table II. In the mentioned table,
estimates of stock market depth, stock market liquidity, and bond market depth
are showed, according to the corresponding estimation method used in each case.
In terms of control variables, the regressions showed that the rate of legal strength
negatively affected stock market liquidity. This indicator was also negatively
impacted by the real interest rate and positively by GDP per capita. On the other
hand, public bond depth was positively influenced by the balance of payments’
current account.
Referring to the impact of pension systems on capital markets, a positive and
highly significant direct effect of Pension funds/GDP over stock market’ depth was
198 Strategica 2016
found, implying that a 1% growth increase in funded pension schemes in the
economy led to a 1.178% rise in stock market capitalization. This result agrees
with those recorded in Hu (2012) and Meng and Pfau (2010). The rest of capital
markets development’ indicators did not report significant findings.
Clustering and empirical results
In order to compare the results by type of individual capitalization systems, we
carried out a segmentation of the population into homogeneous groups according
to the importance of pension funds in the economy, measured by Funded pension
schemes/GDP, at different points in time. Therefore, each pension system i was
represented by the time series Si = (si,1999, si,2000, ..., si,2014) of Funded pension
schemes/GDP values, defined in the period 1999-2014. The segmentation was
performed using hierarchical clustering techniques, with the Average Distance,
defined as:
d i , j
t T s s j ,t
2
t 1
i ,t
T
where si,t and sj,t were the values of Funded pension schemes/GDP systems i and j at
time t, respectively and T was the total amount of periods studied. This distance,
calculated in mobile time windows, allowed analyzing whether the performances
of two systems converged or not. Based on this metric, a hierarchical tree (HT) was
built, associating and grouping systems with its closest neighbors, according to the
concept of distance used (Ramal, Toulouse & Virasoro, 1986; Lia, Chu & Hsiao,
2009). These trees can show information about taxonomic aspects present in the
structure of connections from the systems under study (Mantegna, 1999; Brida &
Risso, 2010a and 2010b). The aggregative-hierarchical clustering algorithm
employed in the classification was the Ward algorithm. In turn, two indicators of
detention, the pseudo-F, and pseudo-t, were employed to determine the optimal
number of clusters (Tibshirani, Walther & Hastie, 2001). For the construction of
HT, the R software was used.
In the classification analysis, the period 1999-2014 was selected as the baseline
scenario, containing annual information for a set of fifteen pension systems, and a
second period was added, from 2006 to 2014, which condensed information for a
population of thirty systems. Dynamic clustering analysis involved analyzing
distance matrices taking eleven mobile windows, each with duration of six years,
in order to assess the stability of linkages or associations between different
pension systems.
According to the HT for the base period (1999-2014), the first cluster was
recorded between Colombia and Uruguay’ pension systems, with the minimum
distance, followed by Kazakhstan and Spain. Chile was the system that registered
the greater distance from the others, followed closely by Australia. It was
concluded that systems that presented a similar average distance in the thirteen-
year period surveyed were not necessarily linked by geographical proximity or the
fact of being a mandatory or voluntary system.
Finance and Banking 199
The HT for 2006-2014 period showed the formation of two clusters, the first of
them integrated by Chile and Australia, and the second, by the rest of the systems
studied. The analysis of the distances revealed that the strongest associations
between the surveyed systems (in terms of lower distances) were basically
recorded between systems created in this century. Note for example that in the
first place Honduras was linked with Ukraine; then, Nigeria and Latvia; followed by
Bulgaria and Dominican Republic; Kosovo and Mexico; the Dominican Republic
and Lithuania; Dominican Republic and Latvia, to name the first associations.
Therefore, again we noted that the attribute of mandatory or voluntary was not a
good discriminant between systems, while in contrast, their seniority was a
defining characteristic among them.
Cluster analysis results showed that the population of pension systems was
divided into five groups, integrating twenty of the thirty-one systems analyzed, not
including systems that could be considered heterogeneous or outsiders, as they did
not maintain any links with the other systems analyzed throughout the period
studied.
Given the maturity of the pension systems and their levels of depth in their
respective domestic economies, it was possible to construct typologies of
individual capitalization systems. From the aforementioned typologies, a pension
schemes lifecycle was determined, classifying the different regimes depending on
the maturation stage found (Seijas, 2009). In this regard, the life cycle of a pension
system, regardless of its nature, consists of different stages of evolution, which can
be characterized generally as of incipient, gradual and advanced maturation.
The launch and implementation of a pension scheme coincide with Incipient
maturation stage, characterized by the exponential growth of managed pension
funds and affiliates, a limited selection of allowed investments and low levels of
profitability. The following phase of a pension’s scheme is the Gradual maturation,
or growth stage, where the list of permitted investments is expanded -with a
positive impact on profitability in general-, gradually introducing risk rating to
adjust investment limits and generally enabling asset allocation to shares and
foreign investments. At this stage, widespread in time, it is highly possible to
distinguish different sub-stages of evolution, since the demographic, politic and
economic characteristics of each system determine a different rhythm in their
transition to stability. Finally, we can find the phase of stability or consolidation of
the system, or Advanced maturation, where the growth of managed funds and
affiliates is stabilized, matching active workers’ contributions with retirement
benefits outflows. In addition, the flexibility of investment options is deepened,
raising the ceiling of permitted investments. Typically, this stage also records the
introduction of multi-fund, intended to meet the investment options of different
affiliates´ profiles.
The summary of the results obtained in terms of the association between pension
systems and their stages of maturity is included in Table 3.
200 Strategica 2016
Table 3. Types of pension systems
Cluster Maturation stage Pension systems
1 Advanced AU-CL
2 High gradual CO-PL-UY
3 Intermediate gradual ES-KZ
4 Low gradual MX-PA-HU
5 Incipient CZ-CR-HR-XK-UA-EE-HN-BG-RU-LV
Note: Own elaboration based on R – ISO country codes
These findings are consistent with Seijas (2009) who, from a cluster analysis
applied to a set of quantitative information of pension schemes in Latin America,
assigned Chile (2005, 2007 and 2008) and Uruguay (2007 and 2008) to an
advanced stage of maturation; Colombia (2005, 2007 and 2008), Mexico (2007 and
2008) and Uruguay (2005), to a gradual maturation level, and Mexico (2005) and
Costa Rica (2005), to an incipient stage of maturation.
Impact analysis and empirical results as cluster
For each of the clusters identified in Section 4, the panel data regression
methodology described in Section 2 was iterated, in order to determine the impact
of individual capitalization pension systems on domestic capital markets.
Table IV includes estimates for each of the capital market development’ indicators
used in the study, organizing results according to the cluster to which the system
belonged in the classification analysis performed.
With regard to stock market depth, it was detected that high gradual maturation
systems experienced a positive reaction of 0.068% following a one percentage
point increase in pension funds’ assets under management while systems that
made up the low gradual maturation cluster recorded a significant but lower
reaction to the increase in managed pension funds (0.016%). In relation to stock
liquidity, it was reported that Turnover reacted negatively to an increase of lagged
Funded pension schemes/GDP for incipient maturation countries. In particular,
given a 1% increase in this variable, a reduction of 0.041% in stock liquidity was
registered in this cluster. Intermediate gradual maturation systems observed
increments in this indicator instead (0.099%).
Relevant to private fixed income market depth, the evidence found positive
causality of advanced, intermediate gradual and incipient maturation clusters
against the growth of pension fund systems (0.002%, 0.036%, and 0.001%,
respectively). Finally, regarding the development of public bond markets, results
indicated that low gradual maturation and incipient maturation clusters showed a
positive and significant correlation of this indicator to pension fund assets’ growth
(19.885% and 16.634%, respectively). This causality was of greater magnitude in
the case of the incipient maturation cluster, which consisted mostly of recently
incepted systems. However, advanced maturation systems observed a positive and
significant impact as well (10.309%). Hu (2012) and Gianetti and Laeven (2009)
also found evidence of positive impact of pension funds on fixed income markets
development.
Finance and Banking 201
Table 4. Funded pensions schemes impact on domestic capital markets
Market Stocks Outstanding Outstanding
Dependent Turnover
capitalization traded / private bonds / public bonds
variable ratio
/ GDP GDP GDP / GDP
Explanatory & control variables
Inflation (log) 3.7576 -.0341 1.636 -.0135 -5.554
(6.876) (.0283) (7.076) (.0084) (4.629)
Per capita GDP -3.0157 .0663* 7.461 .0268 .8768
(log) (6.422) (.0338) (7.219) (.0252) (7.124)
Real interest 1.66e-13 -5.38e- 7.95e-13 .0091 -5.38e-15
rate (7.72e-12) 15** (7.67e-12) (.0504) (4.59e-12)
(2.30e-15)
Legal strength -195.7666 -2.226* 69.046 -.8100 -73.773
indicator (239.140) (1.225) (267.467) (.5397) (252.694)
Interest rate -37.1784 .1269 -3.663 -.1732 -81.783
spread (55.273) (.3186) (63.285) (.2051) (62.667)
Bank 31.9686 -.4601 -15.404 .0398 .9010
nonperforming (70.158) (.3422) (72.872) (.0968) (48.711)
loans to total
gross loans
Current account -.05055 -.0041 -.5744 -.00259 2.369***
balance of (.8805) (.00376) (.9314) (.0019) (.6827)
payments/GDP
Funded pension 117.8073*** .0450 -21.245 .1055 60.897
schemes/GDP (27.379) (.1289) (31.998) (.0867) (39.997)
(lagged)
Cluster
Advanced 565.8187 -.0987 -.1009 .2250* -144.829
maturation (620.1528) (.0528) (.3141) (.0215) (130.859)
cluster
High gradual 1.6062** .3310 -.39348 -.0004 1030.853***
maturation (.6758) (.1256) (.4165) (.0138) (221.481)
cluster
Intermediate 6.8739** 13.728 9.888** 3.587* -138.811
gradual (3.232) (8.712) (4.766) (.3376) (101.621)
maturation
cluster
Low gradual .79021 .9459 -975.207 .1933 1988.468***
maturation (.7486) (2.098) (2620.26) (.1964) (502.038)
cluster
Incipient -.9195 -.8765 -4.088*** .1357* 1663.431***
maturation (1.160) (.5799) (1.421) (.0717) (369.138)
cluster
No. of 339 328 327 324 326
observations
No. of groups 30 30 30 30 30
R-sq: within 0.3747 0.3410 0.7586 0.5635 0.6196
R-sq: between 0.9883 1.000 1.000 1.000 0.7269
F test/Wald 52.87 10075.79 576.90 3542.31 54.10
test (0.000) (0.000) (0.000) (0.000) (0.000)
Notes: t-statistics based on estimations robust to heteroscedasticity and autocorrelation.
The value of the estimated coefficient is reported, indicating the standard error in brackets.
All regressions include year dummies. ***, **, *: 1%, 5% and 10% significance levels,
respectively. According to Hausman and Wald’s tests, we use a random effects model for
Market Capitalization/GDP, Turnover, and Outstanding public bonds/GDP while a fixed
effects model is used for Stocks traded/GDP and Outstanding private bonds/GDP. Funded
pension schemes/GDP is instrumented through its second lag.
Source: Own elaboration using STATA.
202 Strategica 2016
Conclusions and final thoughts
The purpose of this study was to determine if funded pension schemes had
succeeded in developing domestic capital markets, as established by the original
goals of structural reforms. Over a universe of thirty-one funded pension systems,
panel data regressions were constructed, using stock and bond markets depth and
liquidity indicators as well as proxies for pension systems variables and other
indicators of financial markets’ development over the period 1990-2014. The
methodological strategy was complemented by static and dynamic clustering
analysis of pension systems, together with HT statistical tooling, applied to
representative statistical information of its performance.
The outcomes specified in Section 5 confirmed that the attribute of belonging to a
cluster determined significant impacts of pension systems on capital market
development indicators.
In particular, the intermediate gradual maturation systems performance is
noteworthy, as stock and private bond depth, as well as stock liquidity indicators,
showed the most significant positive impact from their rising pension assets,
involving the greater magnitude effects among all clusters that were reported as
statistically significant. The high gradual maturation cluster exerted a positive
impact on the stock depth and also on public bond depth. As regards to private
depth, it received positive impacts from the advanced and incipient maturation
clusters. On the other hand, low gradual and incipient maturation systems growth
generated significant levels of public bonds markets´ depth.
These results demonstrate that pension systems with the higher level of
maturation were related to a further development of equities and private debt
instruments while those transiting low gradual and incipient stages of maturation
were more linked to a greater depth of public debt instruments, which typically
enjoy the preference of pension systems in their early stages of life. These results
are in line with Hu (2012), Meng and Pfau (2010), Giannetti and Laeven (2009)
and Seijas (2009).
The policy implications of this research relate to the differential impact of pension
systems on capital markets in relation to the maturation stage of their life cycle.
This finding highlights the importance of existing public policies that align
individual capitalization pension systems developments with the financial
instruments traded in capital markets, in order to enhance its positive effects on
the economy.
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FOREIGN EXCHANGE MARKET EFFICIENCY IN SELECTED SUB-
SAHARAN AFRICAN COUNTRIES: A TEST FOR MARTINGALE
DIFFERENCE HYPOTHESIS WITH STRUCTURAL BREAKS
Patrick Olufemi ADEYEYE
University of KwaZulu-Natal
King George V Ave, 4041 Durban, South Africa
adeyeyeo@ukzn.ac.za
Olufemi Adewale ALUKO
University of Ilorin
240003 Ilorin, Kwara State, Nigeria
olufemiadewale6@gmail.com
Abstract. Not much attention has been given to the efficiency of forex markets in
African countries, as most existing studies have focused on a single country and only
one study seem to have tested the forex market efficiency of a group of sub-Saharan
African countries comprising Nigeria, Ghana, Uganda, South Africa and Zambia.
Therefore, this study constructs a larger sample consisting of foreign exchange
(forex) markets of 10 countries in sub-Saharan Africa by testing for martingale
difference hypothesis with structural breaks. It uses data on the average official
exchange rate of currencies of the concerned countries to the US dollar from
November 1995 to October 2015(i.e. 1995M11 – 2015M10). The study accounts for
the break period/point in each return series to determine when the structural change
occurred in the forex market by employing the Perron’s unit root test that
endogenously determines the most significant break period in the return series in an
Innovative Outlier (IO) model. Due to the tendency for structural breaks to make the
test for martingale difference hypothesis misleading, the study divides the full sample
period into before structural break (pre-break period) and after the structural break
(post-break period). The pre-break period spans from November 1995 to the month
before the structural break while the post-break period extends from the month after
the structural break to October 2015. The empirical results reveal that the forex
markets of the selected countries are not weak form efficient in the full sample period
except for Burundi and Ghana. Dividing the full sample period into pre-break and
post-break periods, it discovers that the forex markets of Burundi, Ghana, Mauritius,
and Mozambique are weak form efficient in both periods while the forex markets of
Gambia and Madagascar are weak form inefficient in both periods. However, the
forex markets of Mauritania, Sierra Leone, Uganda, and Zambia show inconsistent
results in the pre-break period compared to the post-break period.
Keywords: foreign exchange market efficiency; martingale difference hypothesis;
wild bootstrap variance ratio test; structural break; sub-Saharan Africa.
206 Strategica 2016
Introduction
Investors in the foreign exchange (forex) market are concerned about the
efficiency of the market in order to determine whether there is a possibility to
outperform the market based on past market information. Messe and Rogoff
(1983) pioneered research into the predictability of forex rate based on a random
walk model. The ability to predict forex rate behavior supports the assertion of the
long-run purchasing power parity model. In empirical literature, the quest to
determine the predictability of the forex market is underpinned to the efficient
market hypothesis (EMH) propounded by Fama (1970). The EMH states that
current price is the best predictor of future price, and return is expected to be zero
(Fama, 1970).
Currency traders in an efficient forex market cannot use technical analysis to earn
returns above the average market returns because the forex rate follows a random
walk (non-predictable patterns). Baffes (1994) argue that an efficient forex market
does not mean forex are not predictable, but it implies that arbitrage opportunities
cannot be exploited. Based on the dependence structure of increment series,
Campbell, Lo and Mackinlay (1997) distinguish the random walk model into three
variant models namely: Random Walk 1(RW1), Random Walk 2(RW2) and
Random Walk 3(RW3). RW1 model assumes that price increments are
independently and identically distributed with a zero mean and constant variance.
RW2 model assumes that price increments are independently but not identically
distributed with zero mean and constant variance. Escancianio and Labato (2009)
argue that a financial time-series is a martingale if it corresponds to RW2. The
RW2 model is a stochastic model that is applicable to financial time-series that
tends to volatile or heteroscedastic, hence the model is usually an appropriate
framework to examine the predictability of forex rate. RW3 model assumes that
price increments are not correlated.
The martingale hypothesis and the martingale difference hypothesis (MDH) are
two theorems to assess the efficiency of the forex market. The martingale
hypothesis states that the best forecast of tomorrow’s price is the price of today
while MDH posits that changes in price (returns) are not correlated with past
market information. Under both hypotheses, the forex market is said to be weak-
form efficient. A market is weak-form efficient if the price at time t is orthogonal
with the price at t-1,…...t-n, thus making forecasting efforts vain.
Numerous studies such as Azar (2014), Belarie-Franch and Opong (2005), Charles,
Darné and Kim (2012), Escanciano and Lobato (2009), Lazăr, Todea and Filip
(2012), Lee and Hu (1991), Salisu and Oloko (2015), Yang, Su and Kolari (2012),
and Wright (2000) tested for MDH rather than martingale hypothesis. Escanciano
and Labato (2009) argue that it is easier to deal with returns because price tends
to be non-stationary, thus making it common to test for MDH when assessing the
efficiency of the forex market. Assessing the efficiency of the forex market is an
attempt to examine whether changes in forex rate follows a stochastic process (i.e.
forecast is impossible based on historical market information). Understanding the
behavior of the forex rate is crucial in designing policies targeted at
macroeconomic stability (Mbululu, Auret & Chiliba, 2013).
Finance and Banking 207
Not much attention has been given to the efficiency of forex markets in African
countries. Most studies in Africa such as Aron (1997), Mabakeng and Sheefeni
(2014), Mbululu et al. (2013), Sifunjo, Ngugi, Ganesh and Gituro (2008),
Tweneboah, Amanfo and Kumah (2013) focused on a single country. However, to
the best of our knowledge, Aron, and Ayogu (1997) seem to be the only existing
study that has tested the forex market efficiency of a group of sub-Saharan African
countries (Nigeria, Ghana, Uganda, South Africa and Zambia). Therefore, this study
constructs a larger sample consisting forex markets of sub-Saharan African
countries.
Belarie-Franch and Opong (2005) acknowledge that academics, practitioners, and
regulators are interested in the randomness of forex rate. Implicitly, this study
examines the random behavior or conditional mean independence of returns on
the US dollar against currencies of countries in sub- Saharan Africa in order to
provide empirical assertion to validate or negate MDH. The US dollar is a
benchmark currency in the global market and trade transactions of most African
countries with countries outside Africa are mostly denominated in US dollar. Salisu
and Oloko (2015) advocate that accounting for a structural break in financial time-
series is necessary when testing for MDH to provide meaningful findings, thus this
study accounts for structural breaks in the return series. The rest of this study is
organized as follows. Section 2 deals with the literature review. Section 3 provides
the data and preliminary analyses. Section 4 and Section 5 present the estimation
and conclusion respectively.
Literature review
Myriad of studies have provided evidence on the efficiency of the forex market by
examining whether forex rate is a martingale or random walk. Yang et al. (2007)
noted that martingale and random walk have been used interchangeably despite
not being synonymous. A series is a martingale if innovations or error terms are
independent but not identically distributed (i.e. εt ˷ INID) while it is a random walk
if error terms are independent and identically distributed (i.e. εt ˷ IID). Below is the
chronological review of the empirical studies.
The pioneering work of Messe and Rogoff (1983) showed that the behavior of
forex rate conforms to the random walk hypothesis (RWH). Liu and He (1991)
employed the variance ratio (VR) test and observed that there are autocorrelations
of weekly increments in the nominal forex rate series between August 7, 1974, and
March 29, 1989, thus the study rejects the MDH. Ogiogio (1994) found evidence to
negate RWH using monthly data of the Nigerian forex market from 1989 to 1993.
Aron (1997) used co-integration methodology to examine whether forex returns
are predictable in South Africa. Utilizing monthly parallel (black) market and
official forex rates, the study found that forex returns are predictable, thus
affirming that the forex market of South Africa is not weak-form efficient. Belaire-
Franch and Opong (2005) used the VR test based on ranks and signs on Euro
exchange rates and offered evidence in support of MDH.
Yang et al. (2007) accepted MDH for the Euro relative to the 3 major currencies
(Japanese yen, British pound and US dollar) and observed nonlinear predictability
208 Strategica 2016
in the Euro against several smaller currencies. Sifunjo et al. (2008) employed a
battery of tests consisting of run, unit root, and Ljung-Box Q-statistic tests to
examine whether returns on Kenyan shillings to US dollar are predictable. The
findings rejected the MDH. Al-Khazali and Pyun (2009) examined RWH and MDH
for the Australian dollar and currencies of 7 Asian currencies against the Euro, US
dollar and Japanese yen. The results rejected both hypotheses for all the currencies
over the period January 4, 1993, to December 31, 2008.
Charles and Darné (2009) tested the random walk behavior of daily and weekly
data of Euro against currencies of 11 countries from January 4, 1999, to May 30,
2008. Using VR tests, the RWH was accepted for 8 countries (Australia, Canada,
Japan, United Kingdom, US, New Zealand, Korea and Switzerland). However, RWH
was rejected for daily data for Singapore and Norway and accepted for their
weekly data while it was rejected for Sweden for both data frequencies. Azad
(2009) utilized daily and weekly frequency post-Asian crisis spot exchange rate
data of 12 Asia-Pacific forex markets from January 1998 to July 2007. The VR
provided mixed results. For the daily data, the majority of the forex rates exhibited
martingale behavior while the test on weekly data showed that majority of the
forex rates are not a martingale. This study shows that the randomness of forex
rate may be dependent on data frequency. Gradojević, Djaković, and Andjelić
(2010) invalidated RWH for the Euro/Serbian dinar between January 2005 and
December 2008 using VR tests.
Chiang, Lee, Su and Tzou (2010) employed series of VR tests to examine the
efficiency of the forex markets of Japan, South Korea, Taiwan, and Philippines. The
results provided evidence in support of RWH in the all the forex markets except for
Taiwan. Kumar (2011) applied VR tests on the Indian rupee against the IMF’s
Special Drawing Rights in indexed form between April 1993 and June 2010 and
found that the Indian forex market is weak form inefficient, thus rejecting RWH.
Charles et al. (2012) used daily and weekly data to examine the returns
predictability of the Australian dollar, Canadian dollar, Japanese yen and Swiss
franc against the US dollar from January 2, 1974, to July 17, 2009. Employing the
wild bootstrap automatic VR test, generalized spectral test, and consistent tests,
the findings suggested that forex returns are predictable from time to time
depending on the changing market conditions. The study offered support to the
adaptive market hypothesis put forward by Lo (2004).
Lazăr et al. (2012) evaluated the impact of the 2008 global financial crisis on the
forex market efficiency of 6 Central and Eastern European (CEE) countries from
January 2004 to February 2011. Adopting the generalized spectral test in a rolling
window approach, the study showed that the global financial crisis negatively
affected the efficiency of most of the CEE forex markets. Phillips and Jin (2013)
applied the Kolmogorov-Smirnov and Cramér-von Mises tests on major forex rates
data and found strong evidence in support of the martingale hypothesis.
Tweneboah et al. (2013) examined the behavior of Ghanaian cedi/US dollar
between January1963 and May 2013 using the conventional VR test and the VR
test based on ranks and signs. The outcome did not obey RWH.
Shalari and Stringa (2013) tested the efficiency of the Albanian forex market by
using data on the Albanian Lekë/Euro between January 1, 2002, and December 31,
Finance and Banking 209
2012. Employing the Kolmogorov-Smirnov-Lilliefors and Shapiro-Wilk tests for
normality, the study found that the forex rate is not consistent with the martingale
process, thus suggesting that the market is not weak-form efficient. Mbululu et al.
(2013) showed that RWH is rejected for daily returns on US dollars/Zambian
kwacha between August 1, 2003, to December 31, 2005, using the conventional VR
and the ranks and signs VR tests. Mabakeng and Sheefeni (2014) provided
evidence based on unit root tests that the Namibian forex market was weak form
efficient between January 1993 and December 2011.
Azar (2014) assessed the martingale behavior of the Lebanese pound against the
Australian dollar, Canadian dollar, Swiss franc, Euro, British pound and Japanese
yen from January 4, 2010, to January 31, 2014, using the VR test. The study
provided support for MDH. Almudhaf (2014) investigated the randomness of
currencies of CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South
Africa) relative to the US dollar using weekly data from February 2, 2007, to April
13, 2012. The results of the VR tests indicated the forex rates of all the countries
follow a random walk except Vietnam and Egypt. Salisu and Oloko (2015)
examined the MDH in currencies of 9 countries in the Asia-Pacific region against
the Euro on weekly basis from April 1, 2005, to September 12, 2014. Utilizing the
wild bootstrap automatic VR test and wild bootstrap generalized spectral test, the
results showed that all the currencies aligned to MDH over the whole period.
However, after accounting for a structural break, the results revealed that the
South Korean won rejected MDH prior to its break date while the Chinese yuan did
not support the MDH after its break date.
Data and preliminary analyses
This study constructs a sample consisting of 10 single-user currencies in sub-
Saharan Africa. Data on the average official rate of the currencies against US dollar
as numeraire from November 1995 to October 2015 (i.e. 1995M11 – 2015M10)
are obtained from the World Bank Global Economic Monitor. The return series is
obtained from the forex rate and is calculated as:
(1) Rt 100 logEt Et 1
where Rt is return at time t, the log is natural logarithm, Et – Et–1 is the first
difference of exchange rate.
Table 1. Currency description
Currency ISO 4217 Code User
Burundian franc BIF Burundi
Ghana cedi GHS Ghana
Dalasi GMD The Gambia
Malagasy ariary MGA Madagascar
Ouguiya MRO Mauritania
Mauritian rupee MUR Mauritius
Mozambican metical MZN Mozambique
Leone SLL Sierra Leone
Ugandan shilling UGX Uganda
Zambian kwacha ZMW Zambia
210 Strategica 2016
Table 2. Descriptive statistics
Series Mean Median Maximum Minimum Std.Dev. Skewness Kurtosis Jarque-
Bera
R_BIF 0.738672 0.173609 26.91585 -23.00850 4.412176 0.895865 18.79233 2515.553*
R_GHS 1.381807 0.554335 21.23800 -16.03053 3.089346 1.129946 15.98617 1730.238*
R_GMD 0.586438 0.330443 14.26651 -15.01448 2.964887 -0.206821 10.96015 632.7043*
R_MGA 0.566421 0.253427 23.22857 -8.395489 3.273893 1.664295 12.57926 1024.132*
R_MRO 0.342758 0.217975 8.600377 -5.175366 1.525883 0.785706 8.986141 381.4362*
R_MUR 0.283042 0.267522 7.393133 -6.139624 1.712627 0.208919 6.327144 111.9762*
R_MZN 0.575632 0.253908 15.22991 -10.98918 2.392248 0.939289 11.24251 711.7025*
R_SLL 0.632990 0.290490 18.61851 -11.22481 2.990893 0.981953 11.91884 830.5516*
R_UGX 0.535913 0.384717 9.258722 -7.980215 2.251793 0.139417 4.776655 32.20776*
R_ZMW 1.067860 0.685240 22.80642 -16.44690 4.283228 0.500054 7.660162 226.2266*
Note: * implies a rejection of null hypothesis at 1% significance level.
From Table 1, the mean values of return series for all the currencies are positive,
thus implying that forex rate return of the currencies under consideration
depreciated on the average over the period under review. GHS and MUR have the
highest and lowest mean values respectively in terms of return. BIF records the
highest maximum and lowest minimum values of return among the currencies,
thus indicating that it has the largest variance. The standard deviation indicates
that R_BIF and R_MRO have the highest and lowest statistic respectively, thus
implying that return on BIF is the most volatile while return on MRO is the least
volatile. The skewness statistic shows that all the return series are positively
skewed except R_GMD. The Kurtosis coefficient indicates that all return series have
a leptokurtic (high-peaked and fat-tailed) distribution. The Jarque-Bera statistic
invalidates the null hypothesis of normal distribution for all the return series
(Table 2).
Table 3. Residual diagnostics
Series Q- Q- Q2- Q2- ARCH ARCH LM(10)
statistic(5) statistic(10) statistic(5) statistic(10) LM(5)
R_BIF 12.376** 17.981*** 52.211* 92.933* 7.660413* 5.891018*
R_GHS 67.942* 91.253* 36.860* 56.473* 6.994783* 4.967068*
R_GMD 14.575** 24.819* 22.814* 29.410* 3.886439* 2.248240*
R_MGA 25.627* 35.404* 16.753* 17.605* 3.180009* 1.640611***
R_MRO 25.151* 30.309* 33.008* 33.960* 6.882392* 3.629929*
R_MUR 56.148* 65.509* 44.476* 64.565* 5.853200* 3.196870*
R_MZN 50.624* 57.600* 13.259* 71.989* 2.369036** 6.504206*
R_SLL 39.876* 54.308* 72.866* 86.759* 12.51853* 6.519923*
R_UGX 41.172* 44.497* 39.947* 43.963* 6.106988* 3.392364*
R_ZMW 41.914* 47.500* 28.169* 29.012* 6.576927* 3.372881*
Note: *, ** and *** implies a rejection of null hypothesis at 1%, 5% and 10% significance level
respectively, F-statistic is reported for the ARCH LM test.
From Table 3, Ljung-Box Q-statistic and Q2-statistic reject no autocorrelation of
residuals and squared residuals in all the return series respectively at lags 5 and
10. In addition, the ARCH LM test rejects no ARCH effects in all the return series at
lags 5 and 10, thus confirming the presence of conditional heteroscedascity in all
the return series.
As mentioned earlier, this study accounts for the break period/point in each return
series to determine when the structural change occurred in the forex market. The
study employs the Perron (2006) unit root test that endogenously determines the
Finance and Banking 211
most significant break period in the return series in an Innovative Outlier (IO)
model. The unit root test is performed using the t-statistic for testing the null
hypothesis that δ =1 in the regression model below.
(2)
yt DU t t DTt* DTb t yt 1 ci yt 1 t , t ~ IID 0, 2
k
i 1
where DUt = 1, DTt* = t – Tb if t > Tb and 0 otherwise, D(Tb)t =1 if t = Tb + 1 and 0
otherwise.
Table 4. Unit root test with structural break
Series Break Period Coefficient t-statistic
R_BIF 1998M07 -0.970580 -15.463718*
R_GHS 2000M06 -0.755491 -13.049654*
R_GMD 2007M09 -0.934440 -14.861336*
R_MGA 2004M03 -0.688797 -12.578222*
R_MRO 2008M09 -0.770496 -12.256203*
R_MUR 2010M04 -0.585005 -10.170324*
R_MZN 2005M04 -0.663189 -11.815286*
R_SLL 1997M12 -0.672087 -10.985025*
R_UGX 2008M09 -0.637910 -10.783004*
R_ZMW 2000M11 -0.641189 -10.413725*
Note: * denotes t-statistic exceeds 1% critical value. In addition, the critical value is obtained from
Table 1(e) model 2 in Perron (1997).
It can be observed from Table 4 that all the forex rate return series are stationary
series as expected, hence this study overcomes the problem of using non-
stationary series. Level series of forex rate tends to be non-stationary, thus making
it more complex to test for foreign market efficiency.
Due to the tendency for structural breaks to make the test for martingale
difference hypothesis misleading, the study divides the full sample period into
before structural break (pre-break period) and after the structural break (post-
break period). The pre-break period spans from November 1995 to the month
before the structural break while the post-break period extends from the month
after the structural break to October 2015. The results of the sub-sample periods
are then compared to the full sample period. Table 5 reports the time span for the
pre and post-break periods for each return series.
Table 5. Sub-sample periods for return series
Series Pre-Break Period Post-Break Period
R_BIF 1995M11 – 1998M06 1998M08 – 2015M10
R_GHS 1995M11 – 2000M05 2000M07 – 2015M10
R_GMD 1995M11 – 2007M08 2007M10 – 2015M10
R_MGA 1995M11 – 2004M02 2004M04 – 2015M10
R_MRO 1995M11 – 2008M08 2008M10 – 2015M10
R_MUR 1995M11 – 2010M03 2010M05 – 2015M10
R_MZN 1995M11 – 2005M03 2005M05 – 2015M10
R_SLL 1995M11 – 1997M11 1998M01 – 2015M10
R_UGX 1995M11 – 2008M08 2008M10 – 2015M10
R_ZMW 1995M11 – 2000M10 2000M12 – 2015M10
212 Strategica 2016
R_BIF R_GHS R_GMD R_MGA
30 30 20 30
20 20
10 20
10
10
0 0 10
0
-10
-10 0
-20 -10
-30 -20 -20 -10
96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14
R_MRO R_MUR R_MZN R_SLL
12 8 16 20
12
8
4 10
8
4 4
0 0
0 0
-4
-4 -10
-4
-8
-8 -8 -12 -20
96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14
R_UGX R_ZMW
10 30
20
5
10
0
0
-5
-10
-10 -20
96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14
Figure 1. Graph of return series
Estimation
When forex rate return is non-predictable, it can be said that the forex market
follows a martingale difference sequence (MDS) process. Return follows a MDS
process when the best prediction of tomorrow’s return is the return of today and it
is impracticable to use linear and non-linear combinations of past returns to
forecast future return. The MDS process has implication for the efficiency of the
forex market. The martingale stochastic model is suitable for determining whether
returns are predictable (Lazăr et al., 2012). The model can be stated as:
(3) E Rt 1 Rt , Rt 1 , Rt n 0
where Rt+1 is future return, Rt is current return, Rt–1 is immediate past return, Rt–n is
return lagged by n periods, n is the lag operator.
The variance ratio (VR) test is used to test whether return follows the MDS
process. When VR is equal to 1 or not statistically different from 1, it implies that
the return series has martingale behavior and the forex market is weak form
efficient. The VR at lag p is calculated as:
2 p
(4) VR p
2 1
where 2(p) is times the variance of (xt – xt–p) and 2(1) is the variance of (xt – xt–
1).
Finance and Banking 213
2 p
1 np
xt xt p pˆ
m t p
2
(5)
1 np
2 1 xt xt 1 ˆ
2
np 1 t 1
ˆ
1
np
xnp x0
(6)
p
m np p 11
np
where x0 is the first observation in the series and xnp is the last observation in the
series. Kim (2006) wild bootstrap VR test is employed for this study and it follows
three steps:
a. Construct a bootstrap sample of T observations xt* = txt (t = 1, …, T) where t is a
random sequence with zero mean and unit variance.
b. Calculate the maximum absolute value (MV*) with xt*.
c. Repeat a and b sufficiently m times to form a bootstrap distribution of
MV *j m
j 1 .
The normal bootstrap distribution with bootstrap replications m set at 1000 and
the lag periods for the sub-sample and full sample periods was set at 2, 4, 8 and 16.
The test hypothesis is that the series is martingale and this hypothesis can only be
rejected when the p-value of MV* is greater than 0.1. Table 6 reports the results of
the VR test.
Table 7. Kim (2006) Wild bootstrap VR test results
Sub-sample periods
Series Pre-break period Post-break period Full sample
period
R_BIF [1.156574] [2.272798] [1.693409]
(0.4910) (0.1410) (0.1730)
R_GHS [1.328302] [1.507687] [1.623171]
(0.3460) (0.2840) (0.1790)
R_GMD [2.660273] [2.609951] [3.379695]
(0.0400)** (0.0330)** (0.0110)**
R_MGA [3.055487] [2.595752] [3.789037]
(0.0230)** (0.0430)** (0.0000)*
R_MRO [3.259055] [1.639891] [2.764543]
(0.0060)* (0.2070) (0.0160)**
R_MUR [1.977614] [1.894660] [2.740733]
(0.1200) (0.1190) (0.0290)**
R_MZN [2.097665] [2.299809] [2.534291]
(0.2800) (0.1160) (0.0340)**
R_SLL [1.381913] [2.950385] [3.032697]
(0.4820) (0.0770)*** (0.0250)**
R_UGX [3.054371] [1.977919] [3.424977]
(0.0270)** (0.1470) (0.0040)*
R_ZMW [1.942606] [3.634135] [3.768713]
(0.1490) (0.0020)* (0.0020)*
Note: *, ** and *** indicate the rejection of null hypothesis at 1%, 5% and 10%
significance level respectively, MV* in [ ] and p-value in ( ).
214 Strategica 2016
From Table 6, R_BIF and R_GHS follow the MDS process in the sub-sample and full
sample periods. Conversely, R_GMD and R_MGA do not follow the MDS process in
the sub-sample and full sample periods. The hypothesis that R_MRO is a martingale
is rejected in the pre-break period but is accepted after the break. However,
R_MRO is not a martingale in the full sample period. R_MUR and R_MZN fail to
invalidate MDH in the sub-sample periods but rejects MDH in the full sample
period. R_SLL and R_ZMW are martingale prior to structural break; however, they
do not exhibit martingale behavior subsequent to a structural break. In the full
sample period, R_SLL and R_ZMW reject MDH. R_UGX is non-martingale in the pre-
break and full sample periods but a martingale in the post-break period.
Conclusion
This study assessed the efficiency of the forex markets of 10 countries in sub-
Saharan Africa by testing for MDH using the forex rate of currencies of the
countries against US dollar from November 1995 to October 2015. Using the Kim
(2006) wild bootstrap variance ratio test, it can be observed that only the forex
markets of Burundi and Ghana are weak form efficient before and after the
structural break as well as in the full sample period. On the contrary, the forex
markets of Gambia and Madagascar are not weak form efficient prior to and after
structural breaks as well as in the full sample period. The forex markets of
Mauritania and Uganda are not weak form efficient before the structural break but
are efficient in the weak form after the structural break. However, in the full
sample period, the markets are not weak form efficient. The forex markets of
Mauritius and Mozambique are weak form inefficient in the period before and after
the structural break but weak form efficient in the full sample period. Before the
structural break, the forex markets of Sierra Leone and Zambia are weak form
efficient but became weak form inefficient after the structural break. The forex
markets are not weak form efficient in the full sample period. This study provides
evidence to support that accounting for a structural break is necessary when
testing for MDH. This is because some markets provide mixed results before and
after the structural break period.
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Marketing and Consumer Behavior
Marketing and Consumer Behavior 219
COLLABORATIVE BRANDS – DIGITAL VALUE CREATION IN THE
COLLABORATIVE ECONOMY
Minna-Maari HARMAALA
Haaga-Helia University of Applied Sciences
13 Ratapihantie St., Helsinki, FI-00520, Finland
minna-maari.harmaala@haaga-helia.fi
Abstract. The collaborative economy is impossible to ignore; it is undeniably a global
movement and represents a potential $335 billion market. The collaborative economy
represents a new way of thinking about business, exchange, value and community. While
its definitions are varied and parameters continue to evolve, activities and models within
the collaborative economy enable access instead of ownership, encourage decentralized
networks over centralized institutions, provide new models to unlock wealth and often do
so to a wider group of stakeholders. They make use of idle assets and create new
marketplaces. The burgeoning peer-to-peer economy has also disrupted traditional
business models and is extending to new and different types of markets and as such
provides plenty of opportunities for entrepreneurial activity across different industries
and fields. In the new realm, companies can explore how to provide value by enabling
peer-to-peer sharing or company-enabled platforms for sharing. First-mover companies
can benefit from the collaborative economy trend instead of seeing it as a threat to their
existing business. Existing enterprises have clear assets, such as established brands,
channels and financial muscles with which they can become the leaders in the
collaborative economy if they only manage to rethink their business logic. Brands are
understood as “communicative objects that the brand manager wants consumers to buy
into a symbolic universe as defined, in part, by the brand identity”. Consumers view
brands as a key part of a product as they hold and convey meaning well beyond a
product’s physical characteristics. Brands are a key element of the company’s
relationships with its customers. This paper will provide an extensive literature and
example review of current examples of established brand businesses operating in the
sharing economy. The examples will showcase how existing brands can be extended with
elements of the collaborative economy. Another result of the paper is to highlight
practical examples for existing businesses and brands on how they can start their
involvement in the collaborative sphere and what kind of competitive advantage lies
therein. We demonstrate that when established brands enter the collaborative
consumption space, they can achieve a distinct competitive advantage that is extremely
difficult to copy and thus sustains better leading to improved corporate performance and
strengthened brand value.
Keywords: collaborative economy; brands; competitive advantage; engagement.
220 Strategica 2016
Introduction
The collaborative economy is an economic model where commonly available
technologies enable people to get what they need from each other (Owyang, 2015). As
a phenomenon and a global movement, it is impossible to ignore. Already in 2011,
TIME magazine introduced the sharing economy to be one of the “ten ideas that are
changing the world (Walsh 2011) whereas more recently the World Economic Forum
included the sharing economy in the “six technology megatrends shaping the future of
society” (Brechlbuhl, 2015). It is the next big trend in social commerce. Recent
estimates by Forbes place the sharing economy at 3,5 billion USD in 2013 with a
market growth rate of over 25% (Forbes, 2013; Dervojeda et al., 2013). PwC estimated
in 2014 the five key sectors of the sharing economy globally to be around USD 15
billion and expected to grow to USD 335 billion by 2025 (PwC 2014). The collaborative
or sharing economy is surpassing any other markets in outlook and market growth.
The collaborative economy represents a new way of thinking about business,
exchange, value and community. Activities and models within the collaborative
economy enable access instead of ownership, encourage decentralized networks over
centralized institutions, provide new models to unlock wealth and often do so to a
wider group of stakeholders. They make use of idle assets and create new
marketplaces. Van den Hoff (2013) amongst others, sees that this will lead to a
situation and society where the traditional ways of doing business, existing rules and
the current regulatory framework are challenged and questioned and to a vision of the
society of the future dominated by new economic and social models. The peer-to-peer
economy has also disrupted traditional business models (for example Eckhardt &
Bardhi, 2016) and upset the regulatory status quo. In the new realm, companies can
explore how to provide value by enabling peer-to-peer sharing or company-enabled
platforms for sharing.
The current growth of the collaborative economy is due to the emergence of new
urban lifestyles, and more importantly, the development of digital platforms that
enable new forms of collaboration, as well as the development of professional skills
and services that allow the replication of individual collaborative solutions.
Commercial collaborative economy solutions are more likely to complement, rather
than compete with consumer-to-consumer or public-sector-to-consumer solutions.
This is because the public sector is not likely to expand into new areas in the future.
Nor are consumer-to-consumer solutions likely to grow unless they are professionally
facilitated. This is because it would be too laborious and time-consuming for
consumers to manage collaborative services on a large scale. We believe that extending
purely non-profit collaborative solutions with a facilitator from the commercial sector
is the dominant business model for large-scale collaborative economy solutions in the
future.
The collaborative economy
The collaborative economy builds on distributed networks of connected individuals
and communities. The rise of new forms of consumption is not constrained to
individual actions of buying goods to satisfy needs, but includes collaborative
Marketing and Consumer Behavior 221
consumption, focusing on products as services; redistribution markets; and
collaborative lifestyles (Botsman & Rogers, 2010).
Currently, a vast mix of terms is used in connection with the collaborative economy.
Often synonymously used are collaborative consumption, the sharing economy, and
the peer-to-peer economy. Botsman (2013) emphasizes the need to distinguish
between these and provides distinctions for the terms. The collaborative economy is
built on networks of connected individuals and communities instead of centralized
organizations and transforms how we produce, consume, finance and learn.
Collaborative consumption is an economic model based on sharing, swapping, trading
or renting providing access over ownership. The sharing economy is an economic
model based on sharing underutilized assets whereas the peer economy includes
marketplaces that facilitate the sharing and trade of products and services built on
peer trust.
Owyang (2014) identifies the key forces shaping the development to be either societal,
such as the desire to connect or the sustainability mindset, economic such as the
financial climate or technology enablers such as the internet and mobile technologies.
On the other hand, Botsman (2014) sees the collaborative economy thriving based on
five key problems of redundancy, broken trust, limited access, waste, and complexity.
The sharing economy has the potential to provide a new pathway towards
sustainability as a long-term goal (Heinrichs, 2013). Collaborative systems can, in fact,
be more environmentally friendly by increasing usage efficiency, reducing waste,
incentivizing better products, and by absorbing the excess of production and
consumption. These lead to declines in CO2 levels, noise and traffic congestion and
natural resource savings through product life-cycle extensions and decreases in food
wastage for example (Dlugosz, 2014). Yannopoulou et al. (2013) find references to a
strong sustainability discourse and interpersonal exchange in collaborative
consumption experiences such as Couchsurfing and Airbnb. The sharing economy
makes fuller use of idle resources, allows decentralized production and consumption
systems and provides an outlet for surplus or under-utilized personal goods. It has also
been demonstrated to bring about social benefits through engagement, building trust
and enhancing community values and cohesion for example. However, as Demailly and
Novel (2014), Agyeman et al. (2013) and others point out, the research on the actual,
and not just the expected environmental impacts of the sharing economy have been
very few and sporadic. There is no evidence demonstrating conclusively that the
collaborative economy is either good or bad as a rule in terms of environmental
impacts. Rather, the impact is situational and can vary from very positive to very
negative.
Changing consumer behavior
Consumer behavior is shaped by culture, affluence, personal attributes and a wide
array of other factors. In addition, global megatrends, such as globalization of trade
and commerce, digitalization, the internet and social media and scarcity of resources
have had and are having a profound impact on how consumers behave and how
consumers wish to fulfill their needs. One recent megatrend is consumer engagement.
222 Strategica 2016
The concept of engagement has been used in various disciplines. It can be viewed as a
process characterized by interactions and experiences between a subject and an
object. Within marketing, engagement is taken to mean the psychological process
through which customers move to become loyal towards a brand of their choice
(Bowden, 2009; Brodie, 2011a; Brodie 2011b). Hollebeek (2011) argues that the level
of customers brand -related concentration (immersion), positive affect (passion) and
the level of energy put in particular brand interactions (activation) together represent
just how much the customer is prepared to exert cognitive, emotional and behavioral
investments while interacting with the focal brand (Hollebeek, 2011).
Companies are inventing new ways of integrating consumers in their value creation
processes to enhance the success of new products and services. At the same time,
consumers are creating novel ways of satisfying needs that often include collaboration
with fellow consumers. (Blättel-Mink, 2014). Research in the field of active
consumership and sustainability distinguishes different types of consumer
involvement, or active consumership: ethical consumption, prosuming of a new type,
user innovation and sharing economy (Blättel-Mink, 2014).
Research on consumer involvement in processes of value creation goes back to the
1980s. Alvin Toffler (1980) coined the term “prosumer”– a hybrid of producer and
consumer. The term denotes consumers who are either actively involved in the
creation of products and services for the market, or who take on some of the
traditional functions of producers for their own use. Toffler anticipated that the
spheres of consumption and production, that have been structurally decoupled in the
era of industrial society, will move closer together again in the postindustrial,
respectively the service society. The so-called prosumer economy integrates
consumption and production. The phenomenon of “collaborative consumption and
production” implies prosumership for the benefit of a community. Heimans and Timms
(2014) point out that the change in consumption habits is transforming the consumer
from a passive, traditional consuming role through sharing and funding towards an
active producer or co-owning role where the individual has partial or complete
ownership in related content or assets. They also argue that this change is reflected in
new power models that are enabled by peer coordination and the agency of the crowd
instead of the traditional power residing in organizations and structures (Heimans &
Timms, 2014).
Barkworth (2014) identifies six new trends that will change consumer behavior in the
short- to medium-term as follows.
Table 1. Six trends changing consumer behavior (Barkworth, 2014)
Multiplicity We are increasingly expecting things to do more that involves
interacting with all our senses, offers us a range of touch points to play
with, and involves us entirely in new experiences
Hyper-efficiency We are seeking and discovering ever-smarter and more efficient ways to
solve age-old issues–such as keeping fit, lack of space and limited
resources. The results are sleeker, quicker and use things that have
previously been ignored
The new industrial Science is no longer a closed world, just for geeks. Digital and
revolution technological advances are enabling us to create in new ways–leading to
new creative forms and helping us see a new appreciation of the digital
as a thing of beauty.
Marketing and Consumer Behavior 223
Escape In a world of austerity and grown up responsibility, we are seeing the
increasing desire to let go, to let loose and indulge in childlike freedom
or sheer hedonistic joy.
Mindfulness In a world full of buzz and surface interactions, people are seeking more
depth and meaning. They are craving time away from the stimulus of the
internet, making their leisure time more about self-development, and
taking their own ethical responsibilities seriously
Super- Personalization has been taken out of the hands and tastes of consumers.
personalized This is not just bespoke you select – it is also bespoke that selects you.
Advances in technology mean that products are able to read consumers
and give them what they want – sometimes without even being asked
It is clear to see that all the mentioned trends are in-line with active consumer
engagement, enhanced value creation, and collaborative consumption or smart
consumption. Companies and cities need to embrace this shift in consumer behavior
and recognize that instead of traditionally managing customers or citizens, for example
with some sort of CRM tool, the role of the business and the brand, as well as the city, is
to facilitate collaborative experiences and dialogue that customers value (Baird &
Parasnis, 2011). Consumers are tribal in nature and prone to influence. Cities and
brands should take advantage of this opportunity that rises from consumers forming
communities along mutual interests through social media. Having an engaged
customer and larger audience helps companies avoid the wastefulness of traditional
media advertising. According to marketing agency Hubspot, the average banner ad has
a click-through rate of just 0.1%, for Facebook being even worse at 0.04% (Zwilling,
2013). Clearly, engaging customers and reciprocal relationship creating value for both
the consumer and the company can increase the return on any marketing efforts
manifold.
Currently, the consumer context involves the increase in environmental and social
consciousness, which reflects in the adoption and the preparedness to adopt
alternative forms of production and consumption. This notion of change indicates that
consumers are able to take a more collective approach, where rather than consumers,
they are citizens (Jackson, 2007; Spaargaren & Oosterveer, 2010).
Digitalization and social media as mediators
The internet makes it cheaper and easier than ever to aggregate supply and demand.
Smartphones with maps and satellite positioning can find a nearby room to rent or a
car to borrow. Online social networks and recommendation systems help establish
trust. People are looking to buy services directly when they need them, instead of
owning an asset. Providing a secure platform for financial transactions is vital, but
creating a trusting community is just as important when it comes to attracting users.
Social media has reshaped both the nature of marketing communications as well as
consumer behavior by completely changing the way in which consumers interact with
brands and with each other (Berthon et al., 2008).
Friedman (2005) and van den Hoff (2013) affirm that competition and collaboration
on a global scale, among individuals and companies, are now cheaper, easier, less
conflictive, more productive, and reaching an ever increasing number of people. Global
224 Strategica 2016
society lives in an era where technology will literally transform the business world,
life, and society in all aspects (Friedman, 2005; Rifkin, 2014). According to Friedman
(2005), in the 2000’s a global playing field was created and, articulated through the
web, made different forms of collaboration viable, meaning the sharing of knowledge
and work at global scale. According to Belk (2007), sharing here can be understood as
the act or process of distribution of what is ours for others to use, and/or the act or
process of receiving/taking something that belongs to others for our own use. There
are several on-line communities flourishing, and a trend towards collective production
and innovation (Kozinets et al., 2008).
The advancement and dissemination of ICTs made possible new forms of sharing, and
the ascension of platforms for collective practices that allow interaction, free access to
information, knowledge exchange, creation and collaboration. In an organizational
environment, these practices indicate new business models, new ways of conducting
decision-making processes, product development and collective learning for example.
Benefits and challenges for big brands
Brands are defined in a variety of ways. Important to note is that brands are intended
to identify and differentiate the goods and services of one seller or manufacturer (for
example, Kotler & Keller 2009; Kapferer, 2005). Consumers view brands as a key part
of a product as they hold and convey meaning well beyond a product’s physical
characteristics (Keller, 2003; Kotler & Armstrong, 2004; Kotler & Keller, 2009). Brands
are also argued to signal or convey an understanding of a quality level associated with
the product or service leading to better customer satisfaction and thus lowering the
threshold to choose the product again and making the decision-making process easier
in the face of uncertainty (Erdem, 1998; Kotler & Keller, 2009; Montgomery &
Wernerfelt, 1992).
Brands are a key element of the company’s relationships with its customers. Brand
equity; or the value of the brand, being either high value with strong brands and low
value with weak brands, translates directly into the brand’s potential to create
revenue, business success and competitive advantage for the company (Aaker, 1991;
Keller, 2003; Kotler & Keller, 2009; Erdem & Swait, 1998; Ho-Dac et al., 2013).
Through brand equity; or the effect of the brand on the consumers’ response, loyalty
and trust can be created (Solomon et al., 2006; Kotler & Armstrong, 2009). Laforet
(2011) argues that the relationship between the brand and the customer is in large
based on trust. The bond connecting the consumer and a specific brand involves
feelings and has an element of emotional brand attachment. According to Mooney
(2008), emotional aspects are how a brand can engage a consumer on the level of their
senses and emotions to forge a deeper and lasting connection.
Brands are understood as “communicative objects that the brand manager wants
consumers to buy into a symbolic universe as defined, in part, by the brand identity”
(see Schroeder, 2009, p.124). This traditional perspective fails to consider consumers’
active involvement (Schroeder, 2009). User-generated branding is defined as “the
strategic and operative management of brand related user-generated content to
achieve brand goals” (see Burmann & Arnhold, 2009). The characteristics of UGBs
identified to date can be summarized in the following. Co-creation of value becomes
Marketing and Consumer Behavior 225
central, as the focus is on how to engage actively consumers and staff members in the
same activities (Vargo & Lusch, 2004). Individuals take a variety of roles, including that
of producer, distributor, marketer and user of the product (Pitt et al., 2006). In this
way, resources are spread, while control is shared between users. UGBs foster a new
lifestyle through collaborative consumption and peer-to-peer sharing economies.
There is a noticeable shift towards the so-called ‘exchange economy’, with the
introduction of numerous online brands, which allow consumers not only to purchase
but to also exchange products, services, and skills. UGBs offer unique value to
consumers with regard to identity formation and community building, that is not
compromised by commercial motives, and thus cannot be found in traditional brands
(Hippel, Schroll & Fuller, 2011). This, in turn, appropriates new indicators of success
such as user engagement, value creation, transparency and authenticity (Yannopoulou
et al., 2013).
Kotler and Armstrong (2004) view brand development strategies as a choice between
pursuing growth through new or existing brand names accompanied by new or
existing product categories. Belz and Peattie (2009, 2012) adopt this framework to
study the potential for developing sustainability brands and Campher (2014) works
further on the same framework to provide practical insights into developing
sustainability-oriented brands. The four approaches in this framework are line
extensions, multi-brands, brand extensions and new brands (Kotler & Armstrong,
2004; Belz & Peattie, 2009; Campher, 2014).
Figure 1. Brand development strategies (Kotler & Armstrong, 2004)
With line extensions, companies introduce new items, products or versions using the
existing product category and existing brand name. Line extensions are overall the
most common brand development strategy (Kotler & Keller, 2009). With
sustainability-related brands, this often refers to the introduction of a sustainable
alternative to an existing product, such as an organically sourced alternative or one
made paying close attention to human rights in the supply chain (Belz & Peattie, 2012;
UNEP et al., 2005). Line extensions often cater to changing consumer behavior and
show how the company is reacting to the shifting consumer landscape (Campher,
2014).
Brand extensions are situations in which a company introduces products into a new
product category but under an existing brand name with the intention of using the
existing brand equity to grow (Aaker & Keller, 1990; Tauber, 1981). Sustainability
brand extensions leverage the existing sustainability brand association to introduce
226 Strategica 2016
new products in new categories, such as the growth of TOMS from the original shoe
category into eyewear, coffee, and water. Brand extensions are debated as in addition
to the significant benefits, they entail significant risks related to dilution and
deterioration of brand equity (Aaker, 1990; Roedder-John et al., 1998).
Multi-brands occur when a company has two or more similar and competing products
under different and unrelated brands. While these brands might eat into one another’s
sales, the multi-brand strategy does have some advantages as a means of obtaining
greater shelf space and leaving little for competitors' products, saturating a market by
filling all price and quality gaps and catering to brand-switchers users who like to
experiment with different brands. Companies often introduce sustainability brands
with the multi-brand strategy, such as exemplified by the abundance of large retail
chain’s private label lines catering to different price and sustainability levels (Campher,
2014).
Introducing a new brand in a new product category has the highest level of difficulty
and requires most efforts, while on the other hand it perhaps has the lowest risk of
negatively affecting existing brand equity. A new brand is developed either by an
existing company or by a new company and they can potentially lead to transforming
entire industries, such as the impact of the Prius or Tesla on transportation and
personal cars. Many of the sharing economy examples are in fact new brands that are
transforming the way we consume.
Methodology and results
In our research we took as a starting point established examples of brands that are
involved in the collaborative economy and analyzed them through the brand
development strategies framework, i.e. mapped all of the examples on the grid in the
relevant spaces. The examples were determined into categories after careful
examination, double-checking and evaluating the most prominent feature of the
collaboration to judge whether the example exhibited a line extension, brand
extensions, multi-brands or new brands. We have analyzed and evaluated 223 of the
226 examples of existing brands with involvement in the collaborative economy as
identified by Jeremiah Owyang (2016). The omitted examples did not in our view
demonstrate involvement in the collaborative economy. We then classified all of the
examples into the four brand development strategies categories. However, we found
two specific additional categories, where companies were either experimenting with
the collaborative economy through sponsorship (most commonly sponsorship of bike
sharing schemes) or purely using the collaborative economy to engage with customer
through crowdsourcing or crowdfunding that we viewed as not being examples of a
brand development strategy according to the framework provided by Kotler and
Armstrong (2004). These represent 19% of the examples. However, although not
fitting into the given framework snugly, they might nonetheless provide valuable
business and brand development support by making the brand critically valuable to
consumers through the consumers investing their own time and resources in building
it, which may also boost creativity and innovativeness. Engaging with the customer
and enabling this through a sharing economy platform is one of the benefits brands can
reap from the sharing economy (see also Andjelic, 2014; Fitter, 2015; Duckler, 2015).
Figure 2 shows how all the examples are spread over the different alternatives.
Marketing and Consumer Behavior 227
Figure 2. Classification of brand involvement in the sharing economy (n=223)
Within the brand development framework, it is clear to see that most examples fall
into either line extensions or brand extensions with a minority equally spread between
multi-brands and new brands. The most common examples of the brand extensions are
for example providing a service to accompany an existing product brand, such as
providing a delivery service through a sharing economy platform for an existing
product range or providing an additional value-enhancing service to complement the
product such as maintenance, financing or user support through sharing economy
platforms. In this respect brands partner with existing sharing economy platforms to
provide added value through convenience, easy access or other key customer benefits.
Walgreens, a leading US drug chain, partnering with a platform for outsourcing
errands, TaskRabbit to deliver over-the-counter drug medication is an example of this.
In these cases, the sharing economy creates additional value that the brand alone
cannot deliver.
The most common examples of line extensions are the provision of additional services
suited to collaborative consumption such as new insurance products, widening
accommodation options through sharing economy platforms or providing second-hand
marketplaces to complement existing alternatives. Clearly, the brand’s original legacy
business is going to be more valuable to consumers when an additional marketplace is
added to it. This often also helps signal environmental and durability benefits of the
product. Patagonia, for example, is encouraging more economic transactions around its
products through its second-hand marketplace. This not only expands the product
offering to pre-owned goods but helps open new markets, reach new customers and
effectively distribute the durability and quality message associated with the brand.
Another very important feature and business benefit of the line extensions are clear
asset optimization and ROI increases. Sharing economy platforms, such as LiquidSpace
or Cargomatic, allow companies to maximize return on their existing assets and thus
increasing their ROI through cost savings and increased revenue (see also Duckler,
2015).
228 Strategica 2016
Products as service systems have either been classified under brand extensions or new
brands depending on the option that has been chosen. This is typical in the
transportation sector and it seems equally common to introduce the service concept
under the existing brand name as it is to introduce it under a new brand name
completely. Here brands are increasing their value proposition to the customer by
connecting supply provided by the brand with customer demand in a new way. As
consumer studies show that consumers are increasingly interested in experiences
rather than possessions (see for example Radka, 2011), different rental services in the
transport sector are becoming very appealing.
Figure 3. Brand involvement in the collaborative economy according to the brand
development framework (n=181)
Quite surprisingly it seems that the majority of companies opt to use their existing
brand to enter the collaborative economy, despite the risks associated with its use. Our
original hypothesis was that we would see more variation in how companies approach
new versus existing product categories with respect to the collaborative economy but
the findings show that both are used equally but with a clear dominance on using the
existing brand. This may well reflect the dire need of companies to reflect changing
consumer behavior in their key operations and to demonstrate the capacity and
willingness of the brand and the company to embrace change, new modes of
consumerism and to be regenerating itself with changes in the consumers’ mindset.
Through the examples, we have looked at and the strategies brands have taken to
embark on the inclusion of the sharing economy, it would seem that this endeavor
helps legacy brands open themselves up to new ideas, to new ways of conducting their
operations and to completely new ideas of what value really is. Engaging in the sharing
economy seems to enhance the customer experience and thus create additional
customer value through a wider and more inclusive value proposition. The inclusion or
addition of an element of the sharing economy into the brand promise, necessarily
Marketing and Consumer Behavior 229
means that the consumers and the crowd will become partners and not mere and
distant consumers. With further integration, the crowd will become part of the
company in every business unit (Fitter 2015). The on-line staffing platform Wonolo
was funded partly by Coca-Cola, which means that a customer could be restocking a
retailer’s shelves at the same time he is in the store to buy a drink. The development
obviously means the companies need to be serious about reinventing their business
and their relationship with the consumer and for finding and creating additional value,
not just paying lip service to the idea of the collaborative economy.
As the sharing economy has a strong ideological and mental linkage to sustainability,
even if not scientifically proven, brand involvement with it can help the brand meet the
increased demand for sustainability and the environmental and social concerns of
customers. This might in turn help reach new markets and new customers as
demonstrated by some of the examples.
The brand development strategy of including an element of the sharing economy in the
brand promise may well lead to achieving a distinct competitive advantage (Porter,
1985; Barney, 1991) that is extremely difficult to copy and thus sustains better leading
to improved corporate performance. Business has started to talk about so-called unfair
competitive advantage referring to a competitive advantage so strong and difficult to
copy by other players that it seems almost unfair. Jon Baer (Baer, undated) argues that
it is not patents and other such “old” protection mechanisms but rather attributes such
as profound customer insight, an innovative and agile business model, extraordinary
speed or better channel structure that create an advantage. A genuine engagement
with customers through involvement in collaborative consumption can yield
established companies such a competitive advantage.
Conclusion
Based on these examples we can make a conclusion that for established brands to
participate in the sharing economy or cooperate with a native sharing company is
beneficial to both parties as well as for the community. For the brands, these benefits
include e.g. customer engagement, brand image enhancement, new products and new
markets, exposure to new business models, increased innovativeness, reputation,
loyalty, communication, and intellectual property such as innovation, wider product
ranges, and increased sales.
There are multiple models of adapting the sharing ideology into a brands business, but
the main reasons fall into three rough categories: 1. Teaming up for a collaboration in
promotional purposes only, gaining visibility and engaging consumers in a fun and
memorable way, gaining a more human image. 2. Collaboration for learning purposes
and attaining intellectual capital and innovation. 3. Teaming up for joining forces, thus
gaining a better ability to achieve something new and to serve existing and new
customers and their changing consumer behavior better.
230 Strategica 2016
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234 Strategica 2016
ONLINE VISIBILITY - OPPORTUNITY TO INCREASE TOURISM
COMPETITIVENESS. THE CASE OF THE HOTELS ON THE ROMANIAN
SEASIDE VERSUS THE BULGARIAN SEASIDE
Mihai COSTEA
Stefan cel Mare University of Suceava
13 Universitatii St., 720229, Suceava, Romania
mihai_costeaa@yahoo.com
Cristian-Valentin HAPENCIUC
Stefan cel Mare University of Suceava
13 Universitatii St., 720229, Suceava, Romania
valentinh@seap.usv.ro
Gabriela ARIONESEI
Stefan cel Mare University of Suceava
13 Universitatii St., 720229, Suceava, Romania
gabriela.arionesei@gmail.com
Abstract. The rapid development of the Internet and of the new informational
technologies has a major impact on the tourism industry, thus the destinations with the
highest growth rhythm in this sector are the ones ready, at any moment, to seize the
opportunities specific to the online environment. The proof of the Internet’s and the new
informational technologies’ importance in the tourism activity is that the World
Economic Forum included the IT&C (The Information and Communications Technology)
component among the 14 basic pillars of the Tourism Competitiveness Index. Under these
circumstances, this research paper aims at analyzing comparatively the online visibility
of the hotels from the Romanian seaside with that of the hotels situated on the seaside of
the neighboring country, Bulgaria. The reasons for selecting the two countries were that
both Romania and Bulgaria have many economic, geopolitical or historical similarities.
Despite these similitudes, in the last two decades, the seaside tourism from the two
countries had divergent evolution. Presuming that one of the determiners of the lower
competitiveness and, implicitly, the lower conversion of tourists that the hotels on the
Romanian seaside have in comparison with the hotels from the Bulgarian seaside is
represented by the minimization of the Internet as a tourism promotion and
communication environment, we considered appropriate an analysis through which we
followed the familiarization of the hotels situated in these resorts with the latest terms,
techniques and strategies specific to the virtual environment. We found that in terms of
visibility and communication in the online environment, the hotels on the Romanian
seaside have many strategic and organizational deficiencies, in comparison with similar
hotels from the Bulgarian seaside.
Keywords: Romanian seaside; Bulgarian seaside; tourism competitiveness; online
visibility; website; Facebook; Twitter.
Marketing and Consumer Behavior 235
Introduction
Well integrated into the sphere of the tertiary sector due to the diversified range of
services that are part of its activity, tourism can be considered as being one of the
economic sectors that went through a fulminating development in the last decades.
The dynamism of the industry and the freedom of the specific markets favor the fresh
infusions of capital. These, combined with a series of elements of strategy, with a
favorable legislation, with a marketing policy adapted to the market whose tendencies
are rapidly changing, finally lead to an increase of a destination’s tourism
competitiveness.
Hapenciuc, Stanciu, and Costea (2014) consider that nowadays the hospitality industry
gains new dimensions due to markets’ complexity and to the growth of the tourism
services consumers’ exigency. In the conditions of the markets’ globalization,
according to Hapenciuc et al. (2014, p.22), the hotel industry becomes constrained to
make strategic plans oriented towards obtaining results, trying at the same time to
estimate the change, in order to adapt to an environment in a continuous
transformation.
As the development of the tourism sector of the last years was simultaneously made
with the consolidation of the virtual environment and the diversification of the
communication system on the Internet, today, we can say that tourism represents a
global phenomenon that constantly follows the trends of technology and uses these
vectors willingly (Stanciu & Costea, 2012, p.46).
It is generally accepted by the whole society that the new informational and
communication technologies (IT&C) are in the center of some irreversible economic
and social transformations that affect all countries. However, as Grossek argued
(2006), by far, the greatest economic and social impact on the hospitality industry was
that of the Internet. It is global, accessible to a large audience by its communication
valences, interactive, flexible and full of resources of any kind.
The evidence of the importance of the Internet and of the new informational
technologies in the tourism activity of a public or private organization, tourism
destinations or even countries, is that the World Economic Forum included the IT&C
component among the 14 basic pillars of the tourism competitiveness. Practically, the
variables of this pillar are not represented only by the telecommunications’
infrastructure, but also by the capacity of the tourism organizations and other
organizations to use the new informational technologies and to offer online services
(World Economic Forum, 2015).
Kinkhan (2002) found that the metamorphosis the Internet imposed on tourism had
an impact difficult to estimate exactly, from the moment in which it started to have the
capacity to revolutionize all business’ types, including the creation, the promotion and
the distribution of services. Many of the interactions with the clients are now managed
on the Internet, and the tourism agencies are depending on each another in terms of
cooperation for the achievement of benefits, by using the same communication
environment - the Internet.
236 Strategica 2016
As Balaure, Cătoiu, and Vegheș (2005) stated, the activity of a tourism organization
must concentrate on the internal, but mostly on the external communication. It is
unthinkable to gain success in tourism in the absence of communication through which
useful information are transmitted to the consumers, users, but also to the large public,
concerning both the characteristics of the offered tourism products and services and
also regarding the events in which the organization is involved, the promoted brands
etc.
Nowadays, the presence on the Internet of any tourism destination becomes not only
necessary but also imperative, especially in the conditions in which tourism is an
extremely dynamic and sensitive field, based both on services and on communication.
In addition, in tourism, the efficient communication with the clients is an essential
condition for a business to become competitive, which is why it must respect the truth
and accuracy, these being the most important features that must characterize the
messages transmitted both through the website and through the Facebook, Twitter
pages or other Social Media vectors.
Review of the literature
The Internet, as means of communication and promotion, is widely approached in the
literature, thus there are many opinions and theories on this topic. The opinions are
also shared by the practitioners in the hospitality industry because the outstanding
manner in which the Internet and the informational technologies are evolving scares
some managers and enthuses others. We can say that two antagonistic groups arose,
with different perceptions regarding the utility of the tools specific to the online
environment in defining as coherent as possible the strategies of the tourism
competitiveness growth: the sceptic ones, that are willing to admit the qualities of the
Internet and would like to return to the traditional communication and promotion
methods in tourism and, on the other side of the barricade, the enthusiast group, that
constantly enjoy the advantages of the online instruments.
Authors like Andreescu (2011), Bădău (2011) and Momoc (2014) point out, in detail,
the particularities of the communication mediated by the new informational
technologies, demonstrating the importance of this phenomenon in the framework of
the inter-human relations, but mostly in the business relations. The topic of the
communication in the virtual space is also tangentially approached by Rotariu,
Muntean, and Danciu (2010). Cureteanu, Isac and Lile (2010) consider absolutely
necessary the full use of all the advantages generated by the new informational
technologies, through additional efforts from economic entities in order to develop the
web infrastructure and through the permanent exposure to the best practices
worldwide.
To a great extent, the same ideas are also shared by Hociung and Frâncu (2012), which
consider that the development of the web infrastructure facilitated the direct
communication of the tourism operators with the potential clients and, implicitly, the
accessibility of the latter to various information.
The literature approaches, through numerous studies, the virtual space, pointing out
different specific instruments like the website as part of WEB 1.0 era with its one-to-
Marketing and Consumer Behavior 237
many communication, the Social Media and the leaders in the field (Facebook and
Twitter), as late extensions of WEB 2.0 era with its many-to-many communication. For
the Social Media and its importance in the tourism sector, many authors have shown
their interest, among them being: Tussyadiah and Kim (2013), Hsu (2012) and others.
Obviously, there are numerous research concerns regarding the tourism phenomenon,
in terms of the presence and communication in the online environment; other authors
that marked this niche are Fensel, Leiter, and Thalhammer (2012), Almeida, Silva and
Mendes (2012), Verma, Stock and McCarthy (2012), Egger (2013), Munar and Jacobsen
(2014).
The systematic approaches regarding the comparative analysis of the online visibility
of various entities were achieved by many researchers, like Michalska and Lilleker
(2011), who focused on the use of the Internet by the members of the European
Parliament and analyzed their activity in the Social Media, or Bastida and Huan (2012)
who aimed at a comparative analysis of the stage of the communication in the virtual
space, through a website, of four tourism destinations from Asia (Beijing, Hong Kong,
Shanghai and Taipei). A similar research approach was done by Ting, Kuo and Li
(2012), but, this time, the analysis focused on the message sent by the websites of the
hotels from China and Taiwan. Other authors had more or less focused concerns for
the evaluation of the online competitiveness, such as: Escobar-Rodriguez and Carvajal-
Trujillo (2013) in the hospitability industry from Spain, Tropea (2014) in the hotel
industry from France, Vidovic (2012) regarding the hotels situated in Vienna or
Stavrakantonakis, Toma, Fensel and Fensel (2013), whose wider research approach
aimed at the phenomenon of the online visibility, from the point of view of the hotels
on the entire territory of Austria.
The online visibility of the hotels on the Romanian seaside versus the Bulgarian
seaside, in the context of tourism competitiveness analysis
Research motivation
By simply comparing Romania to Bulgaria, many similarities can be observed: both
countries were part of the communist regime and left it at the same time, the climate is
similar, the types of tourism allowed by the landscape are, to a great extent, the same,
and, in both countries, there are conditions for seaside tourism. Nevertheless, even
despite some competitive advantages that Romania has, it did not succeed to prevail
on the tourism market, at least, at the level accomplished by Bulgaria. For example,
according to the last World Economic Forum Report from 2015, on the Travel &
Tourism Competitiveness Index (TTCI), Romania stands in the 66th position, among
141 countries, as opposed to Bulgaria, which is a direct competitor and stands in the
49th position. After analyzing the data of the same report, we find that Bulgaria, unlike
Romania, managed in the last years to adopt new viable strategies regarding the
legislative and regulation framework of the tourism sector, the business environment,
and the infrastructure, in order to capitalize efficiently the natural, cultural and human
resources. Many differences are to be observed between the two countries in terms of
branding strategies, attractivity to tourists or financial performance (Dinu & Zbuchea,
2010).
238 Strategica 2016
The gap between the two countries is also determined, to a certain extent, by the IT&C
component - as an essential pillar in the analysis of the tourism competitiveness. On
this chapter, Romania obtained 4,4 points from a total of 7, thus placing 59th
worldwide, while Bulgaria occupies the 47th position, with 4,8 points from a total of 7.
In this context, one of the premises we took into consideration when we initiated this
research approach was that a possible explanation for the low competitiveness and,
implicitly, the smaller conversion of tourists that the hotels on the Romanian seaside
have in comparison with the hotels on the Bulgarian seaside is represented by the
minimization of the Internet, as a promotion and communication environment in
tourism, both by the decision makers, at the local, regional and national level, as well as
by the private organizations in the industry.
The research methodology
In order to analyses the tourism offer of the destinations from the Romanian and
Bulgarian seaside, in general, and to establish the level of visibility on the Internet of
the hotels from the two above-mentioned destinations, within the period September -
October 2015, we conducted a research, which aimed at 614 hotels on the Black Sea
coast, these being presented in Table no. 1, according to their classification category.
Table 1. Classification of the hotels subject to the research
Classification
Destination * ** *** **** ***** TOTAL
Romanian 12 104 123 35 7 281
seaside
Bulgarian 0 10 141 157 25 333
seaside
Source: the authors’ processing, according to the data provided by the Romanian National
Authority for Tourism and the National Statistical Institute from Bulgaria
It is important to specify that the study aimed at analyzing all of the hotels, both on the
Romanian and the Bulgarian seaside. The first phase of the research consisted in
strengthening a database with all hotel structures of the two coastal areas. On the
target group formation, there were taken into account the absolute data extracted from
the list of the classified tourist accommodation establishments in Romania, published
by the National Authority for Tourism (ANT, www.turism.gov.ro), and the data
provided by the National Statistical Institute of Bulgaria (www.nsi.bg) and by the
Official Tourism Portal of Bulgaria (www.bulgariatravel.org).
With the list of hotels, we started the second phase of research that consisted in
analyzing the hotel’s online visibility through a website (2.1) and Social Media (2.2).
Likewise, the analysis was based on the data obtained empirically from the analysis of
the websites, Facebook and Twitter pages of the establishments taken into account.
Basically, for each hotel structure identified in the first phase of research, we analyzed
online presence through a website. The websites were determined by successive
searches on the Google search engine and have entered in a process of evaluation of
content, design, and functionality on a Likert scale from 1 to 5, measuring the degree of
online satisfaction (1 representing the minimum appreciation, and 5 the maximum
appreciation). In order to ensure the objectivity of the analysis, the opinions of two
online tourism marketing specialists from the Travel Marketing Studio Company were
consulted. Subsequently, we determined the average scores of each hotel and we
Marketing and Consumer Behavior 239
centralized them in order to determine the statistical gaps between the two
collectivities considered (the Romanian seaside hotels versus Bulgarian seaside
hotels). We also aimed to identify the hotel units which:
- own a website available in a foreign language;
- implemented on their website specific Social Media elements (buttons to disseminate
information such as Facebook like a box or other sharing buttons), price offers (prices
for accommodation and /or food, special offers) or virtual tours to enhance the
effectiveness of the messages sent to customers.
Regarding the presence in Social Media, it was quantified taking into account the
existence of a Facebook and Twitter page, and communication in these social networks
was quantified taking into account the average number of messages posted by a hotel
unit (Twitter) and the existence of at least one post/message of any kind (video
content, photo or text) in the last three months (until the moment of research) for each
hotel from the two coastal areas (Facebook).
The last phase of the research continued with the determination of Pearson correlation
coefficients between two important variables: the number of stars (classification of
hotels) and the quality of websites. It is worth mentioning that the data obtained were
entirely centralized and processed using Microsoft Excel software program.
In this study, we examined the familiarization of the hotels situated in these resorts
with the latest terms, techniques, strategies specific to the virtual environment, as we
consider that the Internet is nowadays an internal and external promotion and
communication environment, which takes increasingly more from the share of the
other channels. Therefore, our main objective consists in a quantitative and qualitative
analysis of the online visibility of the hotels on the Romanian and Bulgarian seaside,
including their presence and activity in the Social Media. The main hypothesis is that
the hotels situated in the resorts of the Romanian seaside are less present online
through a website, as compared to the hotels from the Bulgarian resorts. The presence
of the Romanian tourist accommodation establishments on the social networking sites
is, also, quite shy, the local tourism operators being less familiarized with Facebook
and Twitter, in comparison with the Bulgarian operators.
The main hypotheses on which this research approach is based are:
Hypothesis 1: The majority of the websites that belong to the hotels on the Romanian
seaside are available only in Romanian, the fact that leads to a communication barrier
between the tourism service provider and the potential foreign clients. The situation is
totally opposite when it comes to the Bulgarian hotels, which grant a greater
importance to the optimization of the sites in as many foreign languages as possible. In
other words, the rate of availability of websites in an international language is greater
in the case of Bulgarian seaside hotels.
Hypothesis 2: We estimate that the Bulgarian hotels pay much more attention to the
implementation on the website of the Social Media elements or of the virtual tours, but
also in terms of constant price updating and providing the possibility for online
booking.
Hypothesis 3: Unlike the situation in Romania, the image created and communicated on
the Internet by the hotels on the Bulgarian seaside is more professional, the quality
standards being higher in terms of website’s design and functionality.
240 Strategica 2016
Hypothesis 4: As opposed to Romanian hotels, the hotels from Bulgarian seaside have
more activity in Social Media, in terms of the number of updates and messages posted
on Facebook and Twitter pages.
It is important to note that the whole analysis will be conducted annually, in the sense
that, including in the next years, a number of about 600 tourist accommodation
establishments will be analyzed/supervised on the seaside areas of Romania and
Bulgaria.
Presentation of the research results
In the hotel industry and not only, a starting point in defining the objectives and the
strategies of the online communication, is the presence of the hotels on the Internet,
through a website. In terms of the interest and preoccupation manifested towards this
segment, the signals sent by the hotel industry from the resorts on the Bulgarian
seaside are more positive than those of the similar companies from Romania, because,
according to the conducted study, 67.27% of the hotels situated on the Bulgarian
seaside have their own site of presentation, unlike the situation from our country,
where just over 60% of the hotels understood the utility of a website for the proper
functioning of the external communication process and, implicitly, the tourism activity
(Figure 1).
Undoubtedly, it exists the probability that the potential tourists obtain clipped
information on the hotels without a website, from other sources - friends, tourism
agents, and tourism web portals – and without a sustained presence in the online
environment, even under other forms, the online communication between the
company and the possible client becomes practically inexistent.
Bulgaria
Romania
Figure 1. The online visibility through a website of the hotels from the Romanian seaside
resorts vs. those situated on the Bulgarian seaside
In terms of the tourist accommodation establishments of the hotel type that do not
have or operate a website of their own for external promotion and communication
purposes, the situation is relatively different between the two analyzed seaside areas.
While in Romania, most hotels without a site are those classified by the responsible
ministry at 2 and 3 stars, in Bulgaria the hotels of 3 and 4 stars prevail; in fact, this
situation was expected, especially because, in general, the structure of the hotels is
Marketing and Consumer Behavior 241
dominated by those classified at 2 and 3 stars in the case of the Romanian seaside, and
at 3, respectively 4 stars, in the case of Bulgaria’s seaside.
The tourism operators from the Romanian seaside are rather interested in attracting
Romanian tourists and less interested in optimizing the site in an international
language in order to attract foreign tourists. Thus, only 37.27% of the total analyzed
sites present information in English or, exceptionally, in German and / or French
(Figure 2). On the other side, the Bulgarian hotels emphasize more on the external
tourism component and the communication with it - German, Russian, English,
Romanian tourists - increasing the tourism attractiveness of the hotels and, also, of the
resorts. The Bulgarian hotels conduct an online communication policy sufficiently
oriented towards foreign tourists, because from the 92.4% representing the optimized
sites in a foreign language, no less than 77% present information translated in, at least,
three foreign languages (usually, German, English, and Russian or Romanian). In these
conditions, hypothesis no. 1 is confirmed.
Figure 2. Elements of a website that define the openness of the hotels for an external
communication in the virtual space
We notice that just over 62% of the total number of hotels situated on the Romanian
Black Sea Coast present on their own website the offer / the updated prices’ list, while,
again, the similar hotels on the Bulgarian seaside (76.33%) show that they have better
understood the importance of communicating a clear image of the tariff plan practiced.
Although at the moment when this research was conducted, the 2015 tourism season
was to a great extent closed, there were still many hotels, especially in Romania, which
chose either not to refer to the tourism offers or the tariffs for different periods of the
season or of the off-season or this information were not updated for the season which
had just been closed.
An interesting aspect and, also, worrisome is the fact that much more hotels (75.14%)
situated in the Romanian seaside resorts offer the possibility for users to book online
through a form, although only 62.13% of the total of the analyzed hotels conduct a
clear and on time communication policy of the practiced prices. This slightly
paradoxical situation is also encountered in the case of the hotels on the Bulgarian
seaside, but, in this case, the difference is much smaller, just over 3%. We agree that by
publishing on the site some modern methods of booking, it can be obtained an increase
in the number of tourists, and implicitly, in the returns from the online service sale, but
242 Strategica 2016
we consider that it must be closely correlated with a clear communication of the
offered services and the related charges.
The situation regarding the integration on the website of the Social Media elements of
Facebook Like Box, Social Media Tabs with different keys of Sharing that help the
distribution of the messages sent by the companies is relatively balanced, because
44.97% of the total of the tourist accommodation establishments on the Romanian
seaside and 46.87% of the Bulgarian ones understood the way in which these elements
function and how they can help the improvement of the activity.
Practically, the obtained results confirm, to a great extent, hypothesis number 2,
according to which the hotels on the Bulgarian seaside become aware, pragmatically,
of the usefulness of the implementation on their site of the elements from the Social
Media sphere and the importance of updating the price offers and offering the users
the possibility to book online, to a much greater extent than the hotels from Romania.
The hypothesis is partially rebuffed, if we refer to the situation of the integration on
the sites of the virtual tours, these being one of the most efficient instruments of online
communication of the provided services and of the material basis of a hotel. As it can
be seen in Figure no. 2, the hotels from the Romanian seaside are much more
familiarized with this instrument, as compared to those from the Bulgarian seaside.
Undoubtedly, the design of a site may communicate, at least at the level of perception,
much information about a company. An agreeable design means, above all, an
attractive graphic design and, subsidiarily, efficiently structured pages and accessible
information. From this point of view, there must be a balance between the creation
work and the marketing one.
In the tourism field, many times, people have the tendency to judge a tourist
accommodation establishment according to the website design, and, as it is the best
invitation for a future client to be in contact with the business itself, we considered
opportune enclosing all the 393 identified sites on a Likert scale (from 1 to 5) that
measures the degree of online satisfaction (1 representing the minimum appreciation,
and 5 the maximum appreciation). In order to ensure the objectivity of the analysis, the
opinions of two online tourism marketing specialists from the Travel Marketing Studio
Company were consulted.
Thus, subsequent to the comparative research, we found that 15.38% of the total of the
Romanian hotel websites are entirely unsatisfactory in terms of design and
functionality, being appreciated with a minimum score 1; 20.71% have an
unsatisfactory design - appreciated with 2 points; 20.71% have a satisfactory aspect,
but present some deficiencies related to the systematization of the information and
upload problems, while 27.21% of the sites have a pleasant aspect and were
appreciated with 4 points. It is interesting that only 15.97% of the total of the analyzed
sites obtained a maximum score (5), the fact that proves that improvements must be
achieved in this respect, in order to reach a competitive level regarding the online
communication and promotion instruments. If we refer to the Bulgarian sites, we can
also see in Figure 3 (left), their superior graphic quality, from the point of view of the
general appreciations: 3 points (31.25%), 4 points (26.78%) and 5 points (23.21%).
Marketing and Consumer Behavior 243
Figure 3. Evaluation of the design and functionality of the websites (left) and the general
evaluation of the websites (right) of the hotels on the Romanian and Bulgarian seaside
The obtained results determined us to study thoroughly this problem, by extending the
research sphere and scoring the sites based on the average between the scores related
to the graphic design and the scores obtained subsequent to the evaluation of meeting
the 5 criteria presented in detail in Figure 2. The comparative analysis (Figure 3, right)
also reveals an indisputable superiority of the sites of the hotels situated on the
Bulgarian seaside, especially in terms of their preoccupations to communicate in a
manner as efficient as possible with the public. Under these conditions, hypothesis
number 3 is, also, confirmed.
The gaps highlighted subsequent to the qualitative analysis are reaffirmed by the
calculus of the average of the scores for design and functionality (3,076 in Romania,
compared to 3,513 in Bulgaria) and the average of the general quality of the
communication process through a website (2,751 in Romania, compared to 3,189 in
Bulgaria). Comparing the average scores with the appreciation of the standard hotels
from the two tourism destinations, we can see the evident disparity and the
heterogeneity of the preoccupations for online communication of the analyzed hotels.
The determination of the Pearson correlation coefficient (r є [-1,1]) in the case of the
Romanian hotels (r = 0.42) denotes a strong relationship between the number of stars
variable and the general qualitative level of the sites. Therefore, the higher the
classification (number of stars) of a hotel, the bigger is the qualitative level of the
administered websites. At the level of the hotels from the Bulgarian resorts, the
Pearson correlation coefficient (r = 0.36) points out a moderate link, which
demonstrates that there are still hotels with an inferior classification, yet which have a
qualitative website, both from the point of view of the design and from the point of
view of the quality of the information or their updates etc.
Social Media is considered to be the most rapid and efficient method of the
communication and distribution of information that has developed in the last years.
Nowadays, there are 1.6 billion Facebook users in the world (Statista, 2016), a figure
that shows how important it is for an economic entity the use of the social networks, in
order to communicate with clients or potential clients. Twitter is another extremely
important social network, which has no less than 310 million users (statista.com).
244 Strategica 2016
At a first glance, the hotels on the Romanian seaside seem to give more importance to
the presence of the Social Media, in comparison with the tourism operators from the
Bulgarian seaside (Figure 4). It is true that in this economic context, the presence of a
business on the social networks became a compulsory condition in order to ensure
competitiveness, but it is not, by far, enough. We consider that an active presence in
the Social Media is much more important since the business communicates not only
with the existing clients but also with their friends and contacts. Thus, although the
simple presence in this environment is superior in the case of the Romanian hotels, we
can find that the hotels on the Bulgarian seaside have a much more active presence
both on Facebook and Twitter, updating their pages frequently with new information,
photos, offers, and constantly communicating with the users, both within the season
and in the off-season. For example, the superiority of the communication degree on
Twitter of the hotels from the seaside area of Bulgaria can be demonstrated inclusively
in terms of the average number of messages posted on this social network by the
hotels. Therefore, generally, a hotel on the Bulgarian seaside posted / sent, as an
average, until the conduction of this study, 214 messages (tweets) to the users, while a
hotel on the Romanian seaside transmitted, as an average, 170 such messages.
Consequently, on the basis of the obtained results, we can appreciate that hypothesis
number 4 is confirmed.
Figure 4. Communication in the Social Media of the hotels on the Romanian seaside
versus the Bulgarian seaside
Possible correlations between the activity of the hotels in the Social Media, as an
independent variable of explanatory or factorial type and their popularity on the social
networks (from the point of view of the number of likes, in the case of Facebook, or
followers in the case of Twitter), as an effect variable, of explanatory or resulting type,
are only partially confirmed, because the popularity in the Social Media is also
determined by other factors like how old the pages are, the paid advertising campaigns
or the circumstantial environment. In any case, from a statistic point of view, there is a
link between the two variables, but not of direct proportionality.
Conclusions
On the basis of the carried out analysis, we found out that, in terms of the online
visibility and communication, the hotels on the Romanian seaside of the Black Sea
present many deficiencies, both strategically and from an organizational point of view,
Marketing and Consumer Behavior 245
when compared to the similar hotels situated on the Bulgarian seaside. The Romanian
managers’ expertise on the communication in the sphere of WEB 1.0 (website as a part
of it) and WEB 2.0 (with Social Media as a part of it) is minimal; consequently, there
are few tourist establishments that made a coherent communication strategy in these
environments.
Although, our country and the neighboring country, Bulgaria, can be proud of a rich
tourism potential, similar to a great extent, the major differences mainly resulting from
the methods of administration, promoting and developing this various patrimony that
both countries possess. A possible explanation for the high degree of awareness of the
importance of the online visibility, as a dynamic factor of the tourism competitiveness,
in the case of the Bulgarian tourism operators is a change of the mentality and a
significant openness of the economy, and, implicitly, of the tourism industry, after the
fall of the communist regime, towards the beginning and development of strategic
partnerships with the big international tour operators - TUI, Thomas Cook,
Neckermann, Dertour or ITS. Although they did not invest directly in the hotel industry
from Bulgaria, they gave credits for hotel renovations, guaranteed important flows of
tourists, offered consultancy regarding the introduction of all-inclusive packages,
changed mentalities by imposing some high standards, regarding the quality of
services, the activity of promotion and communication etc., which also explains, to a
large extent, the differences regarding the structure of the hotels on classification
categories, presented in Table no. 1, or the indices of competitiveness, respectively of
tourists’ flows.
Research limits and development perspectives
Like any scientific research, this study presents, undoubtedly, a series of inherent
limits that we identified, but without significant effect on the conclusions obtained
from the conducted analyses and evaluations. Of course, the quantitative analysis
methods, and especially the qualitative ones and, implicitly, the scientific research are
inevitably influenced by the subjectivism of the researcher and of the specialists in
online marketing tourism, whose opinions were consulted, by their cultural-scientific
level, respectively by possible errors of perception and reception of information.
This research does not pretend to present exhaustively the whole problematic of the
communication of the hotel industry in the online environment, especially in the
context of this phenomenon’s complexity. This work is only constituted as an argument
that convinces the actors in the hospitality industry from Romania to systematically
begin the study of the communication phenomenon on the Internet, in a continuous
manner, and, especially, in a professional one. The theories and the proposals of
practical models of qualitative analysis of the stage of online communication can be
developed and improved by new elements from the sources of the theory of business
communication or even, why not, from the experience of the researchers and
practitioners in the field.
We can identify a series of perspectives of subsequent development of this study in the
directions like: formulating and implementing an adjacent research based on a
questionnaire type instrument, through which possible correlations between the stage
of the communication in the virtual space and the opinions of the decision factors from
246 Strategica 2016
the private environment could be determined, regarding the importance and the
usefulness of the online communication, the resumption of the study with an annual or
even bi-annual periodicity, simultaneously with widening the research sphere towards
the analysis of the online communication stage considering other elements from the
Social Media sphere or consolidating the research approach by resorting to other
methods of qualitative evaluation of the online presence.
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248 Strategica 2016
FROM DATA COLLECTION TO BEHAVIOR PREDICTION: WHAT IS
AFTER BIG DATA AND SMALL DATA? PREDICTIVE MARKETING AND
THE PATH TO SUCCESSFUL BUSINESS
Steliana MORARU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
steliana.moraru@gmail.com
Paolo VINCENTI
Cardiff Metropolitan University
71 Linden Gardens St., London, Great Britain
vincenti_paolo@hotmail.com
Abstract. The latest technologies, together with the fast growing access to Internet and
the constant innovation in this field (mobile applications, wearable gadgets, sensor
technology) are transforming the economy and the society per se on a scale never seen
before, offering opportunities for new forms of social interaction and innovative
personalized services. For marketers, this means that tools and strategies that were
considered as cutting-edge, are quickly becoming obsolete, requiring an equally fast
adoption and adaptation to the new tech environment. The present paper is an
exploratory intercession in the way marketers can extract intelligence from big data and
small data in order to better map their strategy, predict future outcomes, map in a more
accurate manner the persons with the highest propensity to become your customers,
highly personalize messages and complement the bigger picture analysis of the role of
different media. From this point of view, the authors focus shifts towards the way
predictive marketing is gaining momentum and has an impact in the way marketers and
new business owners can identify what values and goals guide their brand strategy, what
drives performance for their business and what structures, tools, and working methods
will enhance a purposeful positioning of their brand.
Keywords: big data; predictive marketing; digital; small data; customer; predictive
analytics.
What is next after gathering data
‘The big data revolution is upon us state LaRiviere et al. (2016), while Boyd and
Crawford (2012), Tene and Polonetsky (2013) strengthen it by underlying that we live
in the age of big data. LaRiviere et al. (2016) affirm that survey-based reports find that
firms are currently spending an estimate of $36 billion on storage and infrastructure,
and that is expected to double by 2020. According to IBM, humans create 2.5
quintillion bytes of data. In fact, 90% of the world’s data has been created in the last
two years. The constant usage of the Internet and the advent of technological
innovations, the amount of data available about the customers becomes limitless.
Prior to 2008, data was rarely considered in terms of being small or big, observes
Kitchin and Lauriault (2014). The authors point out that all data was, in effect, what is
Marketing and Consumer Behavior 249
now sometimes referred to, as small data, regardless of their volume. Due to factors
such as cost, resourcing, and the difficulties of generating, processing, analyzing and
storing data, limited volumes of high-quality data were produced through carefully
designed studies, using sampling frameworks designed to ensure representativeness.
When analyzing big data, there are a few characteristics that emerge:
- huge in volume (terabytes or petabytes of data)
- high in velocity, being created in or near real-time
- diverse in variety and type (structured/unstructured in nature, often temporally and
spatially referenced)
- exhaustive in scope, striving to capture entire populations or systems (n=all);
- fine-grained in resolution, aiming to be as detailed as possible, and uniquely indexical
in the identification
- relational in nature, containing common fields that enable the conjoining of different
data sets
- flexible, holding the traits of extensionality (can add new fields easily) and scalability
(can expand in size rapidly) (Dodge & Kitchin, 2005; Boyd & Crawford, 2012; Marz &
Warren, 2012; Mayer-Schonberger & Cukier, 2013; Kitchin, 2013).
The benefits of big data can be identified in a range of sectors, both large scale and
small firms: the ability to analyze operational and transactional data, to glean insights
into the behavior of online customers, to bring new and exceedingly complex products
to market, and to derive deeper understanding from machines and devices within
organizations (Vesset & Morris, 2013). For example:
- Technology companies are using big data to analyze millions of voice sample to
deliver more reliable and accurate voice interfaces
- Banks are using big data techniques to improve fraud detection
- Healthcare providers are leveraging more detailed data to improve patient treatment
- Manufacturers are using it to improve warranty management, equipment
monitoring, optimizing the logistics of getting their products to market
- Retailers are harnessing a wide range of customer interactions, both online and
offline, in order to provide more tailored recommendations and optimal pricing
(Vesset & Morris, 2013).
The term big then is somewhat misleading as big data is characterized by much more
than volume, notes Kitchin (2014). The author details that some ‘small’ datasets can be
very large in size, such as national censuses, that also seek to be exhaustive and have
strong resolution and relationality. However, Kitchin (2014) specifies that census
datasets lack velocity (usually conducted once every 10 years), variety (usually c.30
structured questions), and flexibility (once a census is set and is being administered it
is all but impossible to tweak the questions or add new questions or remove others
and generally the fields are fixed, typically across censuses, to enable time-series
analysis.
Podesta et al. (2014) affirm that one of the most intensely discussed areas of big data
analytics to date has been in the online advertising industry. It is used to serve
customized advertisements as people browse the web or travel around town with their
mobile phone. However, the information collected and the uses to which it is put, are
far broader and quickly changing with data derived from the real world increasingly
being combined with data drawn from online activity.
250 Strategica 2016
The authors note that the end result is a massive increase in the amount of intimate
information compiled about individuals. This information is highly valuable to
businesses of all kinds. It is bought, bartered, traded, and sold. Analyzing and using big
data is challenging and sometimes questionable (Crișan, Zbuchea, & Moraru, 2014). An
entire industry now exists to commoditize the conclusions drawn from that data.
Products sold on the market today include dozens of consumer scores on particular
individuals that describe attributes, propensities, degrees of social influence over
others, financial habits, household wealth, and even suitability as a tenant, job security,
and frailty. While some of these scoring efforts are highly regulated, other uses of data
are not.
LaRiviere et al.’s (2016) question is what is next after gathering big data. Looking at
the current marketing stage, the answer is very close and their answer might be: the
first use case involves predicting demand for consumer products that are in the “long
tail” of consumption. Firms value accurate demand forecasts because inventory is
expensive to keep on shelves and stockout are detrimental to both short-term revenue
and long-term customer engagement. Aggregated total sales are a poor proxy because
firms need to distribute inventory geographically, necessitating hyperlocal forecasts.
The traditional way of solving this problem is using time-series econometrics with
historical sales data. This method works well for popular products in large regions but
tends to fail when data gets thin because random noise overwhelms the underlying
signal. A big data solution to this problem is to use anonymized and aggregated web
search or sentiment data linked to each store’s location on top of the existing time-
series data.
In their book, The only rule is it Has to work, Ben Lindberg and Sam Miller, tell the true
story of how they tried to bring sabermetric1 superiority to the Sonoma Stompers, a
minor league baseball team from California. Inspired by the Moneyball2 theory, the
authors brought predictive analytics in the team. Scharge (2016) analyses their
endeavor and notes that persuading teams to embrace statistics they do not really
understand makes a nifty tale of data-driven despair. Getting people to consistently
and reliably act upon real data is a real leadership challenge. Scharge, in dialogue with
Lindberg, found out that predictive analytics creates organizational winners and
losers, not just insights. In their words, competitive organizations want results and
players are not just supposed to play well; they are expected to win.
The author remarks that predictive analytics explicitly seek to pick winners, sideline
losers, and manage risk. That makes them as much a source of power as insight.
Serious analysts know their numbers will influence who plays, who is seen to have
potential, and who gets cut. The players know this, too. However, who really benefits
when analyst and their spreadsheets gain power? Machiavelli proves a better guide
than mathematics. Lindberg acknowledges that the players they have signed had a
1 Sabermetrics is the empirical analysis of baseball, especially baseball statistics that measure in-game activity. The
term is derived from the acronym SABR, which stands for the Society for American Baseball Research
2 Moneyball: The Art of Winning an Unfair Game is a book by Michael Lewis, published in 2003, about the
Oakland Athletics baseball team and its general manager Billy Beane. Its focus is the team's analytical, sabermetric
approach to assembling a competitive baseball team, despite Oakland's disadvantaged revenue situation. A film
based on the book was released in 2011.
Marketing and Consumer Behavior 251
natural allegiance to them because they were only there because of their spreadsheets
and their stats.
Moreover, Lindenberg and Miller (2016) say that the players were more open to data-
driven suggestion not because they necessarily bought into Moneyball metrics, but out
of gratitude and loyalty. On the one hand, Lindenberg and Miller (2016) observe,
leveraged limited information to target undervalued talent. On the other hand, what
wasn't being measured - self-motivation, team chemistry, manager/player compliance
with statistical insight - had great importance as well. From this perspective, Scharge
affirms that the more analytics become, the more imperative it is to measure their
impact and influence. In other words, metalytics - analyzing the analytics - define how
quants gain insights into how they create insights, as well as how effective they prove
at communicating them.
Predictive analytics is applied in various domains, including analyzing a person’s
individual propensity to criminal activity (Podesta et al., 2014). For example, Podesta
et al. (2014) mention that in response to an epidemic of gang-related murders, the city
of Chicago conducted a pilot that shifts the focus of predictive policing from
geographical factors to identity. By drawing on police and other data and applying
social network analysis, the Chicago police department assembled a list of roughly 400
individuals identified by certain factors as likely to be involved in violent crime. As a
result, police have a heightened awareness of particular individuals that might reflect
factors beyond charges and convictions that are part of the public record.
Gregersen (2013) considers that a new approach to analysis, called catalytic
questioning, is offering business leaders fresh insights about their market. The author
explains that catalytic questioning is an alternative to brainstorming whereby the team
can do question-centric work. They pick a problem that the team cares deeply about
and ask nothing but questions (no answers allowed) until they reach at least 50. After
this process, they should take a step back and determine three or four questions that
are the most “catalytic” – the startling ones that force the team to change your
perspective. After this, the team must seek solutions to these questions until they
uncover extraordinary insights and answers.
An example, in this sense, is a major transportation company that was struggling to
understand what was impacting its financial performance and to predict where the
market was heading. Using catalytic questioning, SAP, who offers software and
technology solutions for business, brainstormed with executives. From the questions,
the data scientists developed forecasting models to analyze more than 48,000
combinations of “products shipped x location x customer” that were validated against
thousands of macroeconomic factors, competitive data, and customer sentiment.
Fueled by uncommon questions and big data, the company in the case is now
predicting future outcomes and competing more successfully.
Anticipating customer needs is not a new concept, Antun and Levin (2015) stress out.
The authors develop that what is new is the ability to anticipate and respond to
customer needs automatically, near real time and at a large scale, for hundreds, or even
millions of customers at a time. Following this path, the promise of predicts marketing
is to bring the personal relationships of the corner store to the modern world of offline
and online marketing.
252 Strategica 2016
Research methodology
The research methodology adopted by the authors is based on descriptive research
based on empirical data from secondary sources. The main purpose of the paper is to
map the means in which companies are incorporating Big Data and predictive analytics
with their traditional research and marketing tools. Moreover, the authors’ aim is also
to better understand how organizations are using this concept to apply their
marketing strategy. The paper is setting a baseline for future in-depth analytical
research.
Predictive marketing
Applications and websites were the first personal data collectors. Podesta et al. (2014)
detail that by tracking users’ activities online, marketers could deliver targeted
advertising and content. More recently, intelligent technology in physical products has
allowed companies in many industries to collect new types of information, including
users’ locations and behavior. The personalization this data allows, such as constant
adaptation to users’ preferences, has become central to the product experience.
(Google’s Nest thermostat, for example, autonomously adjusts heating and cooling as it
learns homeowners’ habits.)
In their study Why Modern B2B Marketers Need Predictive Marketing, Raab Associates
reflect that marketers have used predictive modeling for decades. Applications such as
response models and media mix optimization have reliably produced 20 to 30%
improvements in return on investment. Yet, valuable as they are, these benefits have
been marginal improvements in core marketing operations. On one side, according to
the study, marketers could achieve acceptable results using manual techniques or
doing without them altogether. On the other side, they note that this is not the case in
other applications. Fraud detection during credit card transactions, for example, is only
possible using predictive models to identify questionable behaviors in real time.
Human analysts could not react quickly enough to intervene as the interactions occur.
Similarly, online merchants like Amazon.com gain essential profits from instant,
personalized product recommendations based on predictive analytics. Airlines are
critically dependent on yield optimization systems that adjust prices to fill seats as
profitably as possible.
The rich new streams of data have also made it possible to tackle complex challenges
in fields such as health care, environmental protection, and urban planning. For
example, Medtronic’s digital blood-glucose meter is connected through wireless
sensors to a device that alerts patients and health care providers that blood-glucose
levels are nearing troubling thresholds, allowing preemptive treatments. Moreover,
the car service Uber has recently agreed to share ride-pattern data with Boston
officials so that the city can improve transportation planning and prioritize road
maintenance. These and countless other applications are increasing the power and
value of personal data (Podesta et al., 2014). Predictive marketing is the practice of
extracting information from existing customer data sets to determine a pattern and
Marketing and Consumer Behavior 253
predict future outcomes and trends (Everstring, 2015, The State Report of Predictive
Marketing Survey Report). More specifically, it relies on using data to make more
business wise marketing decisions by predicting which marketing activities are more
likely to be successful and which one are more likely not to be.
Practitioners like Brian Kardon, Chief Marketing Officer (CMO) Lattice Engines and
member of top 10 global CMO Global top for companies with more than 250 million
revenue, says that predictive marketing works by taking all the data about contacts
and accounts in the world – from both internal (e.g. CRM, marketing automation) and
external (e.g. blogs, websites, government sites, social media channels) sources and
applying modern data science to solve marketers’ top challenges – Who is going to be
my next customers? How do I convert them? How can I find more of these ideal
customers? etc.
There are several ways in which predictive marketing is correlated with the data a
company has. Predictive analytics is applied in many ways to help businesses
overcome a plethora of challenges. The core difference in one mode of application to
another is what's being predicted. Predicting customer response, click, or defection are
each very different things, and deliver business value in different ways (Siegel, 2016).
In Gartner’s (2011) framework, the predictive marketing relies on a continuum of
analytics capabilities: descriptive (what happened), diagnostic (why it happened),
predictive (what will happen) and prescriptive (what to do next). In the marketing
field, predictive capabilities can help professionals to forecast with an acceptable level
of reliability what customers are the best fit for them and for the business so the
marketer can take the appropriate actions to convert them into buying customers
more effectively.
More concretely, predictive marketing, with the inclusion of advanced data science is
offering the possibility to marketers to make smarter decisions based on the actions
buyers actually taken and by layering data models over marketing strategies
marketers can have more insight than ever before into their pipeline (Everstring,
2015) Predictive analytics plays a big role in giving businesses the edge to stay
competitive despite the rapid changes in the digital landscape.
According to the specialists at Forrester, predictive marketing is related to data
services in general. They divide the data providers into three categories: data
aggregators (collect and append general business data like contact info), data enrichers
(collect and enrich marketing and sales activity data with insights relevant to the
marketing process), predictive modelers (apply mathematical algorithms to the data to
match patterns to best-fit criteria).
Many companies use predictive marketing to forecast content performance to give
their brand adaptive recommendations. This way, they can analyze their audience’s
engagement patterns and the content produced. Moreover, predictive marketing can
provide valuable information for the sales team, for example, what customers are
likely to convert based on the behavior of the application used.
Siegle (2016) believes that the “magic” of predictive analytics is in how the valuable
segments are discovered. The optimal segment is often arcane and involved, the kind
of esoteric combination of features one would expect only a computer to uncover. Core
254 Strategica 2016
predictive modeling methods do this very well by crunching historical data, thus
learning from the collective experience of your organization.
Studies like shows that How Predictive Marketing Analytics Boosts B2B Business
Performance show that 89% of marketers have predictive analytics on their roadmap
for 2016. The same report determines that 49% of marketers are using predictive
analytics today and 40% plan to implement analytics in the next 12 months. The
additional information identifies that 78% of marketers see their prospects’ buying
journeys becoming more complex and nonlinear. 80% of survey respondents agreed
that buyers are increasingly going online to educate themselves about products and
services.
In what concerns the challenges faced by the marketers, they need to ensure the data
quality and to manage data from a verity of sources (47%), as they attempt to have
more accurate and greater insights about customers and prospects. Less of the
marketers interviewed (36%) face the challenge of managing the velocity of data
generation, one of the foundational elements of big data definitions industry-wide by
Gartner and other research firms.
Table 1. Business Applications of Predictive Analytics (Siegel, 2016)
Business application: What is predicted:
Customer retention customer defection/churn/attrition
Direct marketing customer response
Product recommendations what each customer wants/likes
Behavior-based advertising which ad customer will click on
Email targeting which message customer will respond to
Credit scoring debtor risk
Fundraising for nonprofits donation amount
Insurance pricing and
applicant response, insured the risk
selection
Applied predictive marketing
According to a survey produced by Econsultancy (2016), in which analysts were trying
to state the most important characteristic to establish a "digital culture”, 58% of the
respondents mentioned the capability of being customer centric oriented and 48%
data driven. MacDonald (2016) appreciates that the correlation between the two
characteristics and the consequential usage leads to unveiling the real potential of
customer value and its lifetime (CLV) in order to produce relevant results from
predictive marketing and its techniques.
Carolyn Taylor, CEO and author of ‘Walking the talk: building a culture for success
(2005)’, states customer centricity as one of six archetypes for building a successful
business organization. Zappos retail has implemented its business concept combining
Marketing and Consumer Behavior 255
the benefit of gathering data being customer centric oriented and redefining also the
managing system from Hierarchy to Holacracy (self-management approach) under the
leadership of Tony Hsieh (CEO). According to an article published by the American
Enterprise Institute over the Fortune 500 firms in 1955 vs 2014, 88% of them failed
due to an internal organization, structure and business culture. Laloux (2015) in his
book reinventing organizations describes these dynamics as "Tail" organizations.
Companies like Amazon, Facebook, and Netflix have been pioneering the use of
algorithms and predictive marketing to engage their customers, increase sales and
advertising efficiency. And not only them: companies from domains like
telecommunication, financial services, and gaming industries, use predictive marketing
to change both business and consumer marketing across the customer lifecycle (Antun
& Levin, 2015).
Netflix is one of the most notorious companies to use predictive marketing. With a
team of 800 engineers, they use data to get more engagement with their content. Marr
(2015) recalls that their efforts here began back in 2006 when the company was still
primarily a DVD-mailing business (streaming began a year later). In 2009, the
company offered 1 million dollars to a team or an individual that would improve its
recommendations algorithms. The prize was given to a team of scientists that
improved the algorithm by a little more than 10%.
At first, Marr (2015) noted that analysts were limited by the lack of information they
had on their customers – only four data points (customer ID, movie ID, rating and the
date that the movie was watched) were available for analysis. As soon as streaming
became the primarily delivery method, many new data points on their customers
became accessible. Data, such as time of day that movies are watched, time spent
selecting movies and how often playback was stopped (either by the user or due to
network limitations) all became measurable. Effects that this had on viewers’
enjoyment (based on ratings given to movies) could be observed, and models built to
predict the “perfect storm” situation of customers consistently being served with
movies they will enjoy. Moreover, Netflix ran only in 2015 160 A/B tests, primarily on
new customers, each comparing between two and 20 different experiences. Since most
of Netflix’s new customers are international and have been for some time, its UI
already acts as a global common denominator (Barett, 2016).
In order to launch one of their most famous series, House of Cards, Netflix has used
data from all the 27 million subscribers from the United States. Based on the
information, they could observe that movies directed by David Fincher, the director of
“The Social Network”, were watched from beginning to end (Shama, 2015). This was
not the only information they took into consideration. Based on the big data and small
data, Shama (2015) notes, Netflix identified Kevin Spacey as one of the most popular
actors, while the British version of “House of Cards” was a very well-received mini-
series in the United Kingdom.
Barett (2016) highlights that Netflix has a well-earned reputation for using the
information it gleans about its customers to drive everything from the look of the
service to the shows in which it invests. He describes the process: Netflix assigns each
subscriber three to five of these clusters, weighted by the degree to which each
matches their taste. For all the thousands of titles in the company’s catalog, the average
256 Strategica 2016
member only sees 40 to 50 options in a typical visit. Clusters, which can comprise
anywhere from tens of thousands to millions of subscribers, are what help ensure that
those members see the right 40 to 50. The viewers are not limited strictly to your
cluster assignments, as the algorithm occasionally offers glimpses outside the silo.
Shama (2015) gives another pioneering example in what concerns the predictive
marketing: Amazon. As the author remarks, Amazon is offering a recommendation for
products and services to their users taking into consideration their past behavior.
Antun and Levin (2015) mention that predictive analytics was a practice the company
has installed since their beginning. This way, recommendations that appear under a
product a potential buyer is considering of adding in her cart, is part of what makes
Amazon such an e-commerce powerhouse today. The same authors mention that the
company has stated publicly that 35% percent of its sales come from
recommendations made by their predictive engineers, which would equate USD $25
billion of revenue in 2013. The company is using predictive analytics in many other
ways too, such as predicting what email newsletter to send to you, or to nudge you to
at the right times to reorder an item.
Rijmenam (2016) determines that Amazon uses Big Data to monitor, track and secure
its 1.5 billion items in its retail store that are laying around it 200 fulfillment centers
around the world. The author mentions that Amazon stores the product catalog data in
S3, a simple web service interface that can be used to store any amount of data, at any
time, from anywhere on the web. It can write, read and delete objects up to 5 TB of
data each. The catalog stored in S3 receives more than 50 million updates a week and
every 30 minutes all data received is crunched and reported back to the different
warehouses and the website. Kharabanda (2010) gives another example: one
application of their predictive analytics is that every time a signed up user is
purchasing a product from the Amazon platform, the purchase will be saved and
memorized on a specific server that will create a profile for that specific user. As soon
as profile has been created this person will obtain recommendations that refer to the
recently purchased product on Amazon.
Other industries benefit from starting using predictive marketing. Companies in the
field of personal matching like match.com, OkCupid, Tinder and Badoo are using the
predictive marketing at its best. How do they model and predict human attraction? By
using a series of tools like Synapse to predict customers’ behaviors. Amazon, Netflix,
and Pandora3 are using the same tool to recommend new products, movies or songs
based on a user’s preferences. In addition, in order to gather data, match.com is using
chemistry.com to do personalized surveys and get exhaustive data about their users,
turning then to predictive analytics.
Mavi, a jeans and apparel brand retailer has successfully used the predictive marketing
program to level up their sales and brand awareness. Omer and Levin (2015) note that
Mavi acquired a cloud-based predictive marketing solution in 2009. This decision
allowed the company to consolidate, clean and de-dupe their customer data on a daily
basis. After this step, they were able to start using data gathered to make
hypersonalized campaigns. The authors give the following example of the use of
3
Pandora Internet Radio is a music streaming and automated music recommendation service powered by the
Music Genome Project.
Marketing and Consumer Behavior 257
predictive marketing: the company has used predictive analytics to find groups of
people with distinct product preferences - product-based clusters. They identified at
least three different clusters: customers who favored mostly woven shirts, customers
who favored beachwear, and customers who were more inclined to high fashion.
Having the data, Mavi has launched a reengagement campaign for lapsed customers
and managed to reactivate 20% of them.
Conclusions
The question, ‘What’s next after big data’ is more than legit. As more and more
companies shift the data, the benefits generated by the combination and interaction of
gathering data, analysis, customer value, internal structure are coming to the surface.
In this preliminary research, the intention of the authors consisted in analyzing the
shifts in the conversation regarding gathering data and the practical use of the data for
marketing purposes. The need for a customer-centric approach has always been
present in the marketing strategy. Predictive marketing is bringing more valuable
results to companies, by better understanding the customer data and the potential to
provide customized content. The personalized content equates to a higher retention
rate, reduced attrition rate, and knowing what the customer want before they even
know it.
The impact of predictive marketing and its digital tools on companies’ activities finds
also a reflection on setting and re-implementing budgets for the execution of these. A
study performed by Mondo (2016) called “The Future of Digital Marketing”, in which
262 marketing executives (B2B/B2C) have been interviewed, shows that 80% of the
companies will increase their digital marketing budgets over the next year despite the
modest 3.2% global economy growth (IMF, 2016).
Companies like IBM have recently invested in predictive risk analytic modeling with
the aim of gathering big data in order to avoid or mitigate risk events and
consequentially enhance the efficiency of the operation. Thus the benefit of having
predictive intelligence combined with the identification of the customers DNA, sees
multiple scenarios of its usage defining almost in real time new audience/market’
trends and insights.
Furthermore, local research would surely bring a better rate of understanding of how
local companies are using predictive marketing, especially small to medium size.
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260 Strategica 2016
ECOC 2021 CULTURAL STRATEGIES: AN ANALYSIS OF THE SHORTLISTED
ROMANIAN EUROPEAN CAPITAL OF CULTURE CANDIDATE CITIES
Alexandra NICU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
nicu.alexandra1@gmail.com
Ruxandra DUMITRU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
ruxandra.dumitru@student.comunicare.ro
Abstract. In an increasingly competitive global market, European cities are faced with
the challenge of developing a complex and cohesive urban strategy. In this context, the
European Capital of Culture (ECoC) title can help cities with a lower international
visibility gain various cultural, financial, and social opportunities by engaging in a
rigorous selection process. In the bid for the ECoC 2021 title, Romanian cities had the
chance to develop complex cultural strategies. This paper focuses on the analysis of the
ECoC title applications of the four Romanian finalists (Baia Mare, Bucharest, Cluj-
Napoca, and the eventual laureate city of Timişoara). These case studies are centered on
the proposed cultural strategies and how the candidate cities envision their position in
the European dimension in 2021, in terms of urban development and city branding. By
focusing on how the applications aim to reach and implement the ECoC 2020-2033
Specific Objectives (SO), the analysis will emphasize the distinctions and similarities in
each city’s attempts to gain the title. Though the proposed cultural strategies have
significant differentiations in terms of vision and cultural outreach initiatives, all four of
them emphasized a strong predilection towards European values. Taking into account
the scope of the ECoC program, the Romanian candidate cities’ proposals have integrated
the European Union values, while also devising projects and activities aimed at
celebrating the local culture and heritage. In the present study, we will also explore the
way the proposals encompass and highlight the concepts of community and cultural
mosaic, important elements throughout the four candidacies and ECoC Guidelines. The
case study contributes to the evolving field of city branding in the European context by
having an initial contribution to the research area in relation to the Romanian ECoC
candidate cities, a complex endeavor that can result in more varied research pertaining
to this topic.
Keywords: urban development; place branding; European City of Culture; urban
strategy; town center management; urban entrepreneurialism; place culture.
Introduction
The 2021 ECoC title is an international endeavor, which will focus on cities from three
countries: Romania, Greece, and a third city from a candidate or potential candidate
country, a statement to the European Union’s aspiration for continuous development.
On 16th September 2016, Timişoara was chosen as Romania’s representative. In the
Marketing and Consumer Behavior 261
present competitive global market, an ECoC title can garner international attention for
an urban area and bolster the local development initiatives.
The initiative of creating a European city of Culture (ECC) was launched in 1983 and
resulted in the 1985 selection of one city for the title by the European Council; this
process continued each year until 1999. The intergovernmental action was seen as a
set of symbolic initiatives aimed at creating a sense of common belonging ranging from
the flag to the anthem, to a new ritual calendar, while at the same time respecting the
contents of national and local cultures (Sassateli, 2002). The ECC title referred to a
community that does not lie in the tangible relations and binding ties between its
people but exists as a reality of the mind, as the image of community its members
share (Sassateli, 2002). When ECC changed to ECoC (European Capital of Culture) it
entailed a total ‘re-contextualization’ of the cities, where multiculturalism and ethnic
diversity have been adopted as a part of the ‘re-branding’ process. Over the decades,
the program has transitioned from a cultural initiative to a significant social, political,
and economic factor in the local, national, and EU policies including various
geographical, political, moral, cultural and pragmatic meanings (Lähdesmäki, 2012).
The main goal of this study is to analyze the cultural strategies of the four finalist ECoC
cities from Romania, with an emphasis on how they incorporated and plan on reaching
the ECoC 2020-2033 Specific Objectives (SO) into their proposals. This research
emphasizes the distinctions and similarities in each city’s overall cultural strategy,
with a focus on urban development, city branding, and community input.
Urban development
The European Capital of Culture, a mega-event reserved for European Union states, is
one of the first cultural initiatives developed based on European membership, as a way
to generate cultural coherence (Oancă, 2015), a primary goal which has since morphed
into a strong competition among member-states, given its perception as a 'major urban
development catalyst' (Tölle, 2016, p.376). The ECoC concept presupposes a notable
degree of integration and mobilization, from the cultural elite and business sphere to
the local public, as it can regenerate deprived urban areas and convey their image on
an international scale (Tölle, 2016).
Though an ECoC title can entail an image rebranding for the designated city (Mooney,
2004), as a means to rejuvenate or increase tourism, the underlying cultural elements
serve as a basis for the future initiatives. In the current economic landscape, a shift
towards a service-oriented economy has translated culture into a commodity with
market value, placing it at the center of urban development (Garcia, 2004). It has also
paved the way toward a tendency of making the production or urban spaces a more
transparent process, as a result of transitioning from a more urban marketing
approach to a broader city branding initiative, as well as more localized plans
regarding urban regeneration in the European Union (Garcia, 2004). Though urban
growth strategies can vary in goal and scope, depending on the local necessities and
opportunities (Savitch & Kantor, 2003), it's clear they encourage cities or regions to
have an edge in an increasingly competitive market.
262 Strategica 2016
With a three-pronged approach--urban regeneration, creation and rejuvenation of
cultural facilities, and cultural events--the ECoC title can have a major impact on a
city's center, where heritage can be exploited to encourage economic regeneration and
artistic expression (Balsas, 2004), through strategic investment and an overall
cohesive vision. Town center management (TCM) (Warnaby, 2005, p.184) becomes one
of the main ways in which traditional urban retail areas have attempted to counter the
threat from increased retail provision in off-center locations. Traditional town centers
have an important role in the provision of social infrastructure and cultural heritage
vitalized by retailing which has been conceptualized as a ‘secondary’ element of place
product (Warnaby, 2005, p.185).
Engaging in solid development strategies in the quest of offering distinct, unique
experiences has led to implementing events as a major component of economic and
urban development strategy, in a process called 'eventification' (Jakob, 2012, p.448). In
the ECoC context, urban festivals and other cultural events contribute to a positive
image and economic growth bringing together stakeholders who will provide a
competitive image, which can result in festivalization, an important part of the urban
regeneration of post-socialist economies and involves foreign new urban identities
(Johansson & Kociatkeiwicz, 2011, p.393).
This tendency also has the added bonus of including local stakeholders and producers
of cultural products (such as local artists) in urban growth initiatives (Jakob, 2012).
Culture could be a solid ground for city branding with positive influence on urban
development (Zbuchea, 2014). The local public's relation to urban development, either
its full inclusion or cvasi-exclusion from the overarching strategy and vision, can also
impact the success of an urban development infrastructure. Residents' attitudes can
play a major role in the success of urban progress in regards to facets such as tourism
(Andriotis & Vaughan, 2003).
In order to gain a hold in the increasingly competitive international market, a city bent
on urban development needs to also focus on community development and less
privileged neighborhoods, integrating them into the larger rejuvenation scheme and
political structure of influence, a tendency which has grown in the European Union
with positive results (Savitch & Kantor, 2003; Christiaens et al., 2007). Turning to
cultural institutions, such as museums, as a means of community growth and reducing
discrepancies based on social capital is also prevalent in today's socio-economic
landscape (Message, 2009).
In an era of globalization, networking on an international scale is also perceived as
being an element that can offer an added bonus in contemporary competitive context,
with the European Union strives for connecting the member-states to the global
economy (Pain et al., 2016).
The ECoC program involves changes of the city image and communication, branding or
marketing strategies as Lähdesmäki’s (2012) studies concluded. The candidate cities’
attempts to become more attractive to investors and tourists, can lead, in some cases
to reducing multiple, diverse social realities and lived experienced into a readily
consumable package (Jones, 2004, p.352). Brenner (1999, p.446) presented the
concept of urban entrepreneurialism considering that today, municipal EU
governments are embracing urban strategies which entail construction places for
Marketing and Consumer Behavior 263
industrial development (office centers, industrial parks, telematics networks, transport
and shipping terminals and various types of retail, entertainment, and cultural
facilities). Jones (2004) added that the adoption of urban entrepreneurialism also
requires the emergence of an elite-based growth coalition, reflecting wider trends in
local economic policy. Nonetheless, Jones concludes that a city (e.g. Liverpool) might
experience a record of cultural innovation, but still be the home of extreme inequalities
and noted that ECoC will engender a ‘policy that celebrates marginality rather than
seeking to redress it’ (Jones, 2004, p.353). ECoC understands regions like competing
firms that should be actively marketed as a ‘product’ in the area of economic
development policy (Brenner, 2003, p.298).
City branding
Most urban areas have to compete with internationally renowned locations, which
have a clear, defined image. In the attempt to garner an increasingly larger number of
tourists, numerous strategies with a cultural basis are employed, such as festivals,
museums, art shows, stadiums, etc. (Gotham, 2001).
The Treaty of Lisbon and the European Agenda for culture stress the unity and the
diversity as the key features of European cultural identity and understands cultural
heritage as a shared legacy of Europeanness with a profoundly important role in the
current production of commonality and integration within the EU (Lähdesmäki, 2012,
p.191). In various EU policy documents diverse regional and national heritage sites
and monuments are often ‘Europeanized’ – represented as European and as a part of
common European cultural identity (Lähdesmäki, 2012, p.192).
The ECoC program includes cities that integrate various European themes and
integrate the collaboration between artists and other cultural actors from different
member states into the ‘invention’ of Europe as a cultural entity (Warnaby, 2013, p.
348). In this context, we find important to discuss the concept of place branding which
can be seen as socially constructed meaning systems (Warnaby, 2013, p.399).
Seen as a more developed concept of place marketing, which focused on the
importance of ‘selling’ an appropriate image of the place through the construction of
narratives relating to its potential to create a sense of place ‘attachment’, place
branding has a dual aim: to form a ‘unique selling proposition’ that will secure visibility
to the outside and to reinforce ‘local identity’ to the inside with stories about it
(Colomb & Kalandides as cited in Warnaby, 2013, p.346). Re-branding a place implies
re-inventing the city through ‘place myths’ (Warnaby, 2013, p.347) with the purpose to
make the city attractive for external investment. The place brand is a living concept
which becomes an open-end process, within which a range of place stakeholders will
participate (Warnaby, 2013, p.350) especially in ECoC program. Place brands are
articulations within discourses, in specific ‘vocabularies of images’ and transformed
into a social reality (Pasquinelli, 2014, p.730).
The European dimension of a cultural capital includes both the concept of place
attachment, which can be understand as an affective bond or link between people and
specific places known also as topophilia, and the concept of place detachment which
arise from negative memories/experiences and/or historical events that are difficult to
264 Strategica 2016
reconcile (Warnaby, 2013, p.350). Warnaby (2013) suggests that even if a place
provokes bad memories or unpalatable histories, that does not mean there will be an
automatic sense of detachment. The notion of thanatourism and the connections
people feel with places such as concentration camps (e.g. Auschwitz), battlefield sites
and other similar harrowing sites shows that such places can both repeal and attract
simultaneously. To connect with our cities bidbooks proposals, we can understand that
both Timisoara and Bucharest began their presentation with their reminiscences of
communism and the struggle to incur a European identity despite their historic
consequences. Internal brand strength consists of the brand commitment and the
brand citizenship behavior dimensions (Bregoli, 2012).
Tourist destination brand image focuses on the critical need for stakeholder
involvement in order to help a region through a long-term strategy by increasing
employment and boosting economic growth. Tourist destination brand image also
focuses on ‘adding value in such a way that the buyer or user perceives relevant unique
added values which match their needs more closely’ and directly affects tourists’
intention to visit (Ashton, 2014, p.281).
In the competitive landscape of city branding, designing an image which differentiates
one destination among the multitude of tourist locations available at any given time is
crucial (Pike, 2010). Without a clearly defined identity, destination branding strategies
can fall short, especially in today's socio-economic context, where abrupt events on a
macro-environmental scale can derail a branding initiative or damage the image of a
destination (Baker & Cameron, 2007). Coherence in branding strategy is key, as
uneven attempts can lead to a decrease in tourism yield. In order to accommodate the
growing demands of the tourism market, Baker, and Cameron (2007, p.92) have
identified four stages of destination brand building based on success factors: strategic
orientation, destination identity and image, stakeholder involvement, and
implementation, monitoring, and review.
Place identity and place branding are interwoven processes (Kavaratzis & Hatch,
2013), though distinct, with a basis in the geographical and cultural characteristics of a
given destination (Hudson et al., 2016). The strategy takes its incipient characteristics
from the local expression of cultural features and accentuating them into grounded
concepts, vital for the creation of a brand image (Kavaratzis & Hatch, 2013).
A major component in place identity creation is place culture, which is understood as 'a
way of life as this is experienced and created by the people that live in a place,
therefore providing the context for internal definitions of place identity' (Kavaratzis &
Hatch, 2013, p.78). Accentuating the cultural component humanizes a destination,
providing personality, defined as 'the set of human characteristics associated with a
destination' (Ekinci & Hosany, 2006, p.127), which can have a positive impact on the
image. Urban branding initiatives can lend themselves to personification and make use
of architecture and design as a means of creating a coherent image (Neill, 2001).
Given Europe's cultural diversity, attracting tourists based on cultural hubs pertaining
to specific minority expressions isn't a new phenomenon, but it has recently increased
in popularity (Murieşianu, 2014). The discussion of diverse heritage is particularly
prominent in ECoC strategies, representing a great opportunity for development
regarding regions where minority cultures can be seen as enriching the core culture,
Marketing and Consumer Behavior 265
some of them even being recognized as 'national' minorities (Ashworth et al., 2007,
p.142).
Case study analysis
The ECoC Selection Panel’s Pre-Selection Stage report noted that the 2021 candidacy is
the first time cities in Romania have developed specific cultural strategies based on a
cultural program dimension against six criteria: contribution to the long-term strategy
of the city, European dimension, cultural and artistic content, capacity to deliver,
outreach and management. The case study revolves around the four finalist cities’
proposals for the ECoC title, by analyzing their respective cultural strategies. The
research question our analysis stemmed from is:
What cultural strategies did each Romanian finalist candidate city develop in order to
meet the ECoC 2020-2033 Specific Objectives?
This research question encompasses our main goal, that of detailing the candidate
cities’ proposals in terms of European vision and cultural development initiatives. This
analysis is based on the four ECoC 2020-2033 SOs:
SO1: Enhance the range, diversity and European dimension of the cultural offering in
cities, including through transnational cooperation
SO2: Widen access to and participation in culture.
SO3: Strengthen the capacity of the cultural sector and its links with other sectors.
SO4: Raise the international profile of cities through culture.
Analysis of the ECoC 2021 proposals
Baia Mare
The city assumed an ‘entrepreneurial vision for our endeavor’ (BM, p.7) and also
implemented some planned cultural changes in the preparation stage. As Baia Mare is
the ‘main gateway to Maramureş County’ (BM, p.7), the proposal highlights the
region's cultural variety and rich tourism opportunities in the four historical counties:
Chioarului, Lăpușului, Codrului and the Historic Maramureș. One of the emphases in
the candidacy is increasing the development between urban and rural communities in
their shared goal of development while underlining the region's uniqueness and
regional assets (amongst which are the eight churches listed as UNESCO World
Heritage sites). In terms of regional cooperation, a protocol of collaboration has been
established between the cities in the metropolitan area in order to further enhance the
overall cultural program.
The overall vision detailed in the proposal stems from The Culture of Hosting, the
conceptual engine of the initiative, which encompasses the region's ‘ability to
understand, accommodate, integrate and value different cultures’ (BM, p.10) in a
multicultural international context. Further detailing this approach, the proposal
accentuates the ‘four steps of hosting’--Meet (Open Maps), Greet (New Nomads), Show
(Portal. Sings and Rituals), Share (Translating (Hi)Story). The program is designed to
‘reconfirm European traditional topics’ (BM, p.20), while also acknowledging the
impact mass media has on audiences' perception. The proposal details numerous
international projects which Baia Mare wants to participate in, such as Global
Biopolitics, 125 Years of Women & Art, etc., with a strong emphasis on European and
international co-production endeavors with regions such as South America and Central
266 Strategica 2016
Asia, as well as highlighting initiatives which focus on community backgrounds, such
as Performing Foods. The entire framework of the cultural program can be summed up
in ‘Think Locally, Act Globally’ (BM, p.24). The proposal also highlights the social
inclusion of the Roma community, as well as placing culture at ‘the heart of city
development’ (BM, p.15). In line with the overall marginalized communities, several
projects have been proposed, such as Rebuilding Babel, which will focus on ‘the heavily
polluted old industrial area of the city’ (BM, p.30), while others focus on exhibiting the
rich and diverse cultural heritage of the region (Instagrammer, etc.).
The cultural strategy revolves around establishing the city and region as ‘an
independent cultural sector’ (BM, p.12) with a multicultural community, and
establishing a strong economy with a regional tech hub which can develop on an
international scale, and ecotourism, with the main goal of producing ‘evolution, rather
than just change’ (BM, p.12). Apart from the technological industry, Baia Mare
proposes a culturally-driven development of other areas of expertise such as the textile
industry and enabling ‘trans-sectorial research results as open-source data for
investors and operators’ (BM, p.14).
The proposal also includes several events to bolster the region's economy and image
through culture, such as Know Now Festival, The Old Calendar, etc., with each month of
2021 being marked by celebrations pertaining to a specific part of Romanian folk
mythology and culture (Summer Fairies for June, etc.). Their initiatives also give a
sense of combining old traditions with new technologies, in order to create a
sustainable, long-term tourism industry in the region. The pregnant local authenticity
is a point repeated throughout the proposal, as it gives the bid the uniqueness so
intrinsic to ECoC, which can be explored in terms of tourism. In terms of urban
infrastructure, the city planned to explore the potential of public spaces with ‘human
scale cultural equipment’ (BM, p.60) in a ‘City as a stage’ initiative, by employing the
tactic of trials and experiments before implementing major changes, as well as
rehabilitating patrimony buildings.
Bucharest
The Bucharest proposal insists on the paradoxical nature of the city in a continuous
struggle with its unresolved contradictions between Western logos and Balkan ethos,
socialist past and neoliberal laissez-faire present in order to create an identity (B, p.5).
Bucharest2021 introduces the notion of the fragmented city and presents the capital of
Romania as an archipelago: the city’s human scale urban planning and architecture
was fractured for the first time at the end of the 19th century by the construction of
monumental buildings under plans for modernizing the capital. In the 1980s, more
than one-third of the historic center was demolished to make room for the gigantic
House of the People (now hosting the Parliament). This traumatic fragmentation of the
city’s urban tissue has irreversibly shaped the city, disconnecting the city center from
the neighboring quarters and fragmenting the central area into isolated neighborhoods
(B, p.5).
The concept of the invisible city was inspired by Italos Calvino’s novel and suggesting
the idea that art makes the invisible visible and serves as a vital perspective on
Bucharest and European urban culture. In terms of European Culture, Bucharest2021
insists on the partnerships with other ex-communist cities from Central Europe, and it
Marketing and Consumer Behavior 267
also puts a stress on the EUroma project and on the Museum of Multiculturality
founding in accordance with DELI Programme.
Bucharest2021 insists on the activity of a Bucharest-Ilfov Regional Development
Agency (BIRDA) as a regional administration of the funds on both a national and
European level responsible for the regional strategic investment for the period 2014-
2020 and accentuates the regional perspective as a significant part of cultural tourism.
Bucharest branding paradigm sees the city as a tourist destination, as a knowledge city
and as historic ‘monuments’ (B, p. ), all of them contributing to a balanced urban
development and mentions the six steps of a global city (local, regional, national,
super-national, continental, global) underlying that a cultural capital is not only a
matter of size but also of interconnectivity.
Bucharest proposal also explores the TCM concept and insists that in many
neighborhoods, shopping malls are now the only alternative for spending free time and
stands for the creation of a cultural ecosystem of the city where hackathons, Balkan
Express program cluster, contemporary arts, and civic initiative will redesign the space
in surrounding areas.
Cluj-Napoca
Cluj-Napoca boasts an eclectic mix of artistic and cultural programs renowned on both
a national and international level. Their ECoC proposal has the slogan ‘East of West’,
which encompasses their overall vision of ‘re-signifying Europe beyond East and West’
(CN, p.15), a process of ‘social transformation’ (CN, p.23) by bridging the East-West
gap through ‘a mutual transfusion of knowledge’ (CN, p.15).
In terms of transnational cooperation, which has ‘a transversal priority’ (CN, p.17), the
proposal focuses on artistic co-production initiatives (such as the Artist-In-Residence or
New Media programs) with European partners and cultural operators from
neighboring countries such as Republic of Moldavia, Hungary, Bulgaria, etc. One of the
goals is to support the career development of transnational artists and ‘active
citizenship and entrepreneurship’ by people from different countries (CN, p.82)
through multilingual programs such as Creative Europe 2014-2020 and Europe for
Citizens 2014-2020. The ECoC Candidate Cities Network was also launched in Cluj-
Napoca in 2016, with the city agreeing upon a memorandum of cooperation with Baia
Mare 2021 (CN, p.21).
A high degree of community participation to cultural endeavors is highlighted in The
Open Academy of Change initiative and the Jivipen project (geared towards the Roma
population). Another important initiative is the Integram project, which will have a
platform where ‘these different cultures meet and enter into a creative dialogue’ (CN,
p.75). Other projects, such as the InClujing You initiative is aimed at cultural enclaves of
foreign students studying in Cluj-Napoca, such as the French or Moldavian students.
With culture presented as the ‘creator of new meanings’ (CN, p.22), the proposal
continues with its re-signifying vision by elaborating a three-tier approach: Culture
Inspires (re-signifying art practice in context), Culture Connects (re-signifying the
intercultural experience), and Culture Works (re-signifying ‘work, authenticity, place
268 Strategica 2016
making, innovation and strategic distribution’ (CN, p.23). The Open Academy of Change-
-’strategy to develop human capacities and generate opportunities for participation
and cocreation’ (CN, p. 77)—encompasses all of them. Activities range from Culture
Therapy in Hospitals and The Museum of Broken Relationships to The European Center
for Contemporary Arts (with its three programs, Visual Arts, New Media Arts and
Performing Arts).
The city aims to increase ‘capacity of our citizens, organizations, and community’ (CN,
p.23). The cultural program developed for the ECoC year will have a basis in the city's
multi-ethnic heritage, with Romanian, Hungarian, and Roma symbols being integrated
into the creative outcome (CN, p.65). Though Cluj-Napoca has an ‘impressive cultural
infrastructure’ (CN, p.67), the objective is to reinforce and develop this position
through the ECoC title, as well as bolster the city's urban and tourism infrastructures
with initiatives such as Someş River Rehabilitation, Transylvania Cultural Centre.
With the title of ‘Silicon Valley of Romania’ (CN, p.4), Cluj-Napoca boasts a diverse IT
sector, which it plans on developing fully, from outsourcing to a sustainable industry.
The proposal includes initiating the ‘‘spillover effect’, the productive influence of
cultural processes on creative industries, by developing new hybrid models of
production of value at a European scale’ (CN, p.11). Though Cluj-Napoca has some of
the most well-known Romanian events on an international scale, such as TIFF
(Transylvania International Film Festival), Electric Castle and Untold festivals, the
proposal mentions the city's goal is to ‘be an eventful place, instead of becoming a
festival-ised city’ (CN, p.6).
Timişoara
In terms of European dimension, Timişoara has shown an ‘increased sensitivity
towards its European mosaic’ (TM, p.20) and proposed two programs in order to
celebrate their European diversity: Light over borders and Moving fireplaces. Their
programs, seen as a European Journey, are based not only on the different languages
spoken by the historic ethnic groups but also on the languages of new communities
such as Arabic, Asian and Italian minorities. Timişoara has also established
transnational partnerships with cities from Serbia, Hungary, Croatia and Germany and
with some of them collaborate in Light over borders. In the Dare! initiative, the city will
engage residents of Timisoara in a trans-neighborhood dialogue.
Comprehended as a European journey, access and participation in cultural activities are
based on three key terms: People, Places, and Connections. As we demonstrated in the
literature review above, the three terms can be easily linked with the stakeholders
involved in the development of the region in order to reach a European dimension. The
stakeholders are invited to Power Station Project which redefines the international
profile of Timişoara not only in terms of culture but also in terms of technology. The
Station Player of Change is built on the spirit of 1989 revolution and brings into the
spotlight the change makers of today, in their diversity of form and expression (TM,
p.38). The trail Invisible/visible deconstruct stereotypes of Roma communities, not only
in the Timişoara and Banat region but also in Europe, encouraging vulnerable groups
to get involved in the cultural representation.
Marketing and Consumer Behavior 269
Timişoara’s proposal empowers citizens to co-curate and tell the story of the city
through Spotlight Heritage trial and gives public spaces a voice through design and
architecture interventions. By organizing a multilingual festival--Mega Bega--
Timişoara celebrates a Europe of diversity and interdependence through theater, films,
music, land art, and interaction.
Moving Fireplaces Festival raises the international profile of the city by telling the past
stories of people on-the-move and sensitizing the public in order to raise awareness on
the effects of xenophobia and intolerant behavior. The name of the festival is a
metaphor; the fireplace is a symbol of comfort, safety, and warmth (TM, p.54).
In the future, Timişoara aims to brand itself as a point meeting of IT&C and Culture and
encourages cross-border exchange. Timişoara focuses its strategy on the strong
connection with the other cities in the region and highlights its strategic position in the
heart of the cross-border region emphasizing the key role of creative industries. The
proposal insists on the concept of tolerance in a space with over 30 different cultures.
Discussions
As detailed above, the European dimension is highlighted throughout all four
proposals, yet it has a pregnant contribution in Timişoara’s candidacy. Another
important aspect is that of social inclusion, the topic of numerous proposed projects in
all four cities, emphasizing the macro-environmental changes at a European level.
Though all four cities based their initiatives on the cultural heritage and expressions,
Baia Mare’s proposal highlighted local folklore and integrated it into the cultural
strategy, managing to create projects and activities which bring traditional
characteristics into the 21st-century tourism trends.
While transnational cooperation initiatives were a significant part of all the bid books,
Cluj-Napoca’s proposal, stemming from their ‘East of West’ perspective, managed to
encompass a much broader vision relating to international collaboration projects.
Bucharest’s bid is largely influenced by its communist past, but the desire to adhere to
a more Western image is emphasized in its strategy. Though the city has faced
harrowing events in the past, the proposal signifies a shift towards a European vision.
Throughout the proposal analysis, differentiations in terms of vision and cultural
outreach initiatives have been identified. Taking into account the scope of the ECoC
program, the Romanian candidate cities’ proposals were imbued with European Union
values, their projects and activities coherently aimed at celebrating the local culture
and heritage, while also geared towards reaching the ECoC 2020-2033 SOs, with the
different variations highlighted in the research section. Our case study analysis
delineates local cultural strategies in a European context, a field which can be further
expanded in future research.
270 Strategica 2016
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272 Strategica 2016
ANALYSIS OF PROMOTIONAL STRATEGIES IN PRIMARY SCHOOLS
EVA TÓBLOVÁ
Comenius University in Bratislava
3 Moskovská St., 813 34, Bratislava, Slovakia
toblova@fedu.uniba.sk
Abstract. Schools require a plan before communicating out information. They must make
sure that there are enough resources invested in communication streams. Time, energy
and personnel should be ensured so that they do not negatively impact communication
streams. IMC can reap rewards in two ways, firstly by avoiding communication/branding
issues for the school, and second by making sure that a consistent message is always sent
out. Most effective strategies for promoting schools are public relations, direct marketing
and advertising and partly personal marketing. Primary schools used to promote school
activities such as open day, various events and performances for the public and parents.
These promotional activities are part of the public relations marketing communication.
An important element became even school website. However, there can be assigned to
work with the public, to direct marketing to advertise and personal marketing. This
paper deals with research aimed at finding effective strategies used by primary school
head teachers within school promotion. The main objective is to analyze the way of
promotion, i.e. communication between the legal guardians of pupils and the school
headmaster. Part of the objective is to establish effective strategies for schools to acquire
potential customers. Our research problems were to determine how effective promotion
strategies used schools to get as many customers. Effective strategies schools are
perceived as a promotional nature school activities that school performed deliberately in
order to obtain the largest possible number of customers. In the last part, this paper
presents the research, the progress, and results, which was implemented in selected
primary schools. This is a qualitative - quantitative research focused on the detection of
successful strategies that schools use to acquire clients. Success in school depends largely
on the method and the quality of its communications with the surroundings.
Communication school should be directed to all school partners: potential, past and
present. Well directed and performed communication helps schools meet it aims to serve
as a tool of marketing mix and marketing communication
.
Keywords: marketing communication; promotion; educational market; costumer’s
school; elementary school.
Introduction
The aim of the paper is to present the essence of marketing, the use of marketing and
marketing strategies in primary schools. Legal guardians and schoolchildren have a
choice of many interesting schools providing primary education, creating a
competition between schools and are forced to compete for students. Success in this
Marketing and Consumer Behavior 273
struggle can be achieved thanks to appropriately chosen marketing strategy and
communications with potential customers, who are parents and their children. Our
task was to determine how effective are the promotional strategies used in primary
schools for customer acquisition.
One of the ways to ensure the existence of a school is the use of marketing. Seek after
answers to what are the desires and needs of customers and how to satisfy them and at
the same time fulfilling the objectives of the school, is the essence of marketing in the
school. One of the components of marketing is a marketing communication or
promotion, which is focused on communication with the public, with current and
potential customers (Prevot, 2015). We were interested in what methods of
communication are used by primary schools for generating potential customers, what
marketing strategies related to the promotion are the most effective and why. We also
decided to examine, how effective these marketing strategies are, in fact, we asked the
schools existing customers and their views on marketing communication with potential
customers and its effectiveness.
This is an issue we are interested in because the marketing of primary schools is now
becoming topical theme and subject, with which the teaching practice meets daily and
must find ways to most effectively apply knowledge of marketing and marketing
communications directly into practice, at the various primary schools. It is possible to
say, that the survival and success of the school depend on the marketing
communication. Each primary school should develop in this area considerable initiative,
be familiar with how to effectively apply different marketing strategies that could attract
new customers and also retain those, who they already have.
Marketing in education
With the ability to profile the primary school and the fact that customers are
increasingly demanding and schools are trying to meet their needs, they arise in schools
new items, hobby groups, and classes that can be considered as part of customer-
orientated marketing. Such a marketing has to address only certain selected number of
customers from the school. However, it is also the way they acquire potential customers
who, through marketing communications (advertising), can learn about the school's
activities.
By target oriented marketing from Světlík (2009), the school may choose two
approaches for its implementation: a concentrated marketing where the school
specialized in one or several segments and creating for them an educational program or
differentiated marketing, where a school offers several different segments and different
educational programs.
The educational market has an impact on the management of the primary school. If the
school intends to succeed in the competition for a student, it is forced to choose
marketing strategies that it moves to the forefront of the customer guarantee them
sufficient information about the quality of service, additional services and exciting
activities the school organizes. The school management, usually a director or manager
of school (mainly the same person) must manage the school at a higher level, and
274 Strategica 2016
through marketing, however, can advertise their services and attract more customers
bringing profit.
According to Světlík (2009, p.19) is a marketing school "management process that
results in the recognition , influence and in the final phase of meeting the needs and
wishes of the customers and the clients, which provides a means of school - effective
manner while meeting the objectives of the school." It is a comprehensive marketing
and operational definition of school that covers all key factors as constituting the
essence of marketing and marketing education.
The education consists of marketing as a process demand - the needs and requirements
of the customers and the role of the schools to provide them revealed through services;
Service - granted on the basis of queries, serving on its fulfillment; price or value - fulfill
customer wishes, but also the requirements of vendors; transaction - is the actual sale of
services; educational market - the place where is a communication between the school
and the customer.
The school, which is marketing-oriented, is characterized by certain features for which
Obdržálek et al. (2004) are the following:
- continuous monitoring of the current and future needs of the target market, requiring
the school to pay continual attention to customer care - students, parents, school
partners and the market;
- systematics market research, which clarifies the issues on market size, his character,
competition;
- qualified defining targets used for camping missions, tasks and mission of the school;
- consequent realization of the functions of the school;
- the innovation of all school activities and continuous improvement of every
phenomenon and processes in order to provide quality and increasing;
- clarifying of the strategy for a long-term existence of the school - that can be rapidly
offensive, which means being the best in the market, mildly offensive, which means be
marketed well or retreat, or defensive, which means offer such a services which already
other schools do not offer, but for a particular school it appear to be favorable;
- systematic monitoring and improving the image of the school, how the school is doing
on the market, how the customers notice offered activities and require them, what the
school has a reputation in your neighborhood;
- merging needs and interests of customers with the needs and interests of the school.
Success in the school depends largely on the method and the quality of its
communications with the surroundings. Communication of the school should be
directed to all school partners: potential, current and past. Well directed and performed
communication helps the school meet its goals, what is it one of the tools of the
marketing mix, the marketing communication (Eger et al., 2010).
Under the marketing communication in the school Světlík (2009, p.212) means "the
systematic use of the principles and practices of the marketing elements in establishing,
strengthening and deepening relations between the school and its customers". The
school is using marketing communication with the public trying to promote their offer,
which builds a positive image and strengthen its position in the education market.
Marketing and Consumer Behavior 275
On the mediation of advertising information are the communication channels in use,
their choice is still a critical factor for advertising success. Choosing the right
combination of media support is called the media mix and it is to keep in mind, that
every medium has some advantages and disadvantages. The basic advertising media are
printed advertising media, print, radio, TV, internet, outdoor advertising media and
promotional materials (Pisoňová et al., 2014).
“The Internet is a common tool of the communication and is an effective mediator for
advertisements and promotions. Typically, the advertisement uses e-mail, presentations
or leaderboard ads (banner)” (Světlík, 2009, p.250). As we mentioned in the direct
marketing, e-mail can be sent only to the partners of the school, who have requested it,
otherwise, it can act as a promotional tool negative. Presentation of the school
promotes on a website and mediate on it a lot of information. This is done not only on
the own website but also on other, where is a link to the presentation. Leaderboard ads,
added to frequently visited sites, that you reserve space for them, these ads contain
substantial brief information and also a link to the website, on which the candidate
learns more about the school.
Communication of the public schools today is unconditional. First, it provides a school
their existence, also it helps to win new customers while getting to know their wishes,
the fulfillment of which leads to improving the quality of services provided.
Communication is also a means of creating a positive public image of the school and the
opportunity to acquire new, profitable partnerships. This is one of the marketing tools
that primary school should implement with reference to the mission, vision and
objectives of the school as their marketing communication and helps to deliver results.
There are many forms of communication with the public and to be effective, it is
important to carefully choose the one, that is relevant to those goals and is in this
situation the most appropriate and most acceptable. At the same time, the success and
characterized by originality and innovation, which, in conjunction with knowledge of
customer needs, the school can provide an important place in the education market.
Therefore, primary schools should be creative in a planning its marketing
communication ideas to stand out among competitors (Pisoňová & Nagyová, 2014).
Methodology and research
Our research problems were to determine how effective promotion strategies used
schools to get as many customers. Effective strategies are perceived as a promotional
nature school activities conducted by schools deliberately, in order to obtain the
largest possible number of customers (Pisoňová, 2016).
The research problem we have formulated in accordance with the objective of the
research. This is a descriptive research problem, which we investigated and described,
in how marketing communication tools are effective for customer acquisition at the
primary schools. This means, we are using the method of interviews with managers of
schools surveyed, what tools of communication mix primary schools used to reach
customers and method of the questionnaire for the parents we surveyed that school
communication strategies were most effective in determining the legal guardians of
students choosing a primary school.
276 Strategica 2016
The result of the research is to analyze the way of promotion and communication
between the legal guardians of schooler and the school principal and identify effective
strategies for generating leads. Within the research we tried to determine if primary
schools use some of the tools of communication mix for acquiring new customers, and if
these strategies are effective. We also investigated, which of the communication
strategies are the most attractive for potential clients and what are the reasons, why
parents choose those primary school for a child.
Based on the research problem and research objectives, as well as on the studying
literature, dedicated to the issue of marketing communication schools, we set a number
of research questions. Research questions we divide in our work in terms of focus on
the object, depending on whether relating to the management of the school (1-4) or
legal guardian of a child (5-7). 1. What is the primary school doing to ensure that
parents have chosen their school for their child? 2. Notes elementary school the
pressure of the education market? 3. What are the marketing strategies used by
managers of primary schools for acquisition clients? 4. What are effective strategies
used by managers of schools to promote school for getting potential customers? 5.
Which of the marketing strategies of school consider the parents as the most effective?
6. What forms of marketing communication for generating potential customers are
considered the most effective by current customers? 7. To what level the extent
promotion of a school fulfilled the expectations of potential customer’s school?
Specifically, the research examined us samples comprising both schools as entities, as
well as managers of the schools and education customers (legal guardians of students
who attend the school). We focused while their view of marketing communication in
terms of potential customers of the former school. Using research methods we acquire
the data for conducting our research. Our objective was to determine how effective
marketing communication tools used by primary schools are, for getting potential
clients. We are looking at used marketing tools, so parents and students can say their
opinion on it, which of these tools are in their choice of a school for their children, most
affected. As we in the research collected data from two different objects, we decided to
use two research methods.
For data acquisition from school leadership, we chose the method of the interview
(interview). Based on the research questions we compiled the interview questions, and
we decided to semi-structured interview. This type of interview has allowed us to obtain
the necessary information while flexibly reacting to the situation during the interview.
As fundamental questions for the interview, we prepared two sets of questions as
follows: A / What primary schools do to ensure that parents choose their school for the
child? 1. Why do you believe should the parents choose your school? Why do you think,
it is better or preferable than another school? 2. Do you feel the pressure of the
education market as manager of the school? Who is your biggest competitor? 3. Why do
you think you win the students or vice versa? 4. Do you have enough interested students
for a first class? B /What marketing communication strategies are used by primary
schools for that parent to choose the right school? 5. What is the marketing philosophy
of your school? What are you trying to achieve? 6. What are the marketing strategies
you use? 7. What tools (modes) marketing communications / promotion use it? 8.
Which tools of marketing communication (promotion methods) do you consider as most
successful and why? 9. What tools of marketing communication have had not produced
Marketing and Consumer Behavior 277
a successful outcome, and why? 10. What advice would you suggest to improve the
quality of marketing and promotional activities of the school to get a higher number of
customers (parents, students)?
The first set of questions we focused on issues relating to the activities that the school
performs for generating customers. We find out here, what a given elementary school
offers, what is unique and why the parents would choose this school for their child. We
are also interested in the perception of the educational market, competitive pressure by
the school and subsequently of what makes the success of schools in this field. So we
come to the second set of questions. It focuses on the marketing philosophy of the
school, the school's marketing strategy, especially the marketing tools that the school
uses, why and how. Finally, we are interested in promoting the school and how school
leaders perceive their marketing communication with the public, particularly with
potential clients.
When obtaining data from parents of students, we have chosen the method of the
questionnaire. Questionnaire for parents contains seven questions (open and closed).
The research was therefore decided to focus qualitative- quantitatively method
interview. It represents a qualitative research component, which is to determine what
promotional activities relevant Elementary School is developing for customer acquisition
and as it is in this direction successful. Within quantitative methods, we collected survey
data to answer questions the effective communication strategy in terms of school
parents.
Research results and interpretation
As the extent of the article does not allow us to list all the observed research results, we
present only the most significant findings of our research. With the interview research
method, we investigated the facts about marketing management school, particularly its
promotional page to the management of the school. We also got a view, what kind of the
idea the school management have for school communication with potential customers
and the school's position in the education market. Three primary schools attended to
the research.
We focused on the educational market, feeling of pressure as a manager of an
elementary school and we have also asked during interviews if there are any significant
competitors in their neighborhood. An executive has consistently said, that the
competition between primary schools perceived and is created by a way of school
funding, she the director of the first school sad is mainly due to the funding of the
schools, because schools depend on the number of students they have "a representative
of the other schools" schools struggle by surrounding the scholars is also due to funding
- that is for the school to survive, and that's the competitive fight." Based on other
answers on this questions, it showed, that the priority is a good educational program,
which attracts scholar’s parents, because, as the deputy of third school sad "training
program which is more acceptable and more advanced and more accommodating - it
meets many parents."
Next, we asked school principals about the marketing strategies, schools use. Director of
the first school admitted that "this is it, what we fail". The second school is at least in
278 Strategica 2016
marketing and promotion of school involved in the schools surveyed. It mainly focuses
on current clients and promoting them through school and uses a relatively limited
repertoire of promotional activities about which we will speak in the analysis the
following questions. Priority for schools is a satisfied customer, based primarily on the
feeling safety at school and one which it enjoyed visiting it. The headmistress B is the
most important quality of service: "We focus on the quality of teaching, quality of
teachers and there is also a quality of the educational program". The third school also
preferred as marketing strategy targeting the quality of the services they provide and at
the same time their variety (extracurricular activities, performances) of which are
promoted via the website of the school. Overall, a marketing concept or philosophy
Schools executives determined to provide quality services: tempting educational
program, teaching the quality, innovative teaching methods and quality of teachers.
Using the questionnaire, we investigated the views of parents on the school`s
communication with based to the acquiring new customers. We are interested in using
an approach existing customer’s school to the marketing communications. The
questionnaire was completed by 68 respondents. First, we analyzed and interpreted
the results and subsequently drawn conclusions from them. The acquired data we will
describe and then we will interpret them into a graph.
The second question concerned to assign importance to constituents school marketing
mix when choosing a school. The respondents were asked, on a scale of 1 to 5, to express
their identification or disagree with those statements, and expresses if its full unit
approval and tail complete disagreement. In completing this questioner, not all of
respondents answered to each question. This applies to all points, except school
atmosphere, to which all of it were answering (Figure 1. The importance of the
components of the marketing mix).
We found out, that when choosing a school, for parents was most important, what kind
is the quality of the services, the school provides. Up to this point belongs to curricula
and the quality and professionalism teaching staff. As the promotion of school
employees, whether consciously or unconscious, is one of the tools of marketing
communication can be considered partly this has to be one of the factors that affect
marketing communication for the potential customers. In terms of marketing
communication is interesting, that on the higher place were ancillary services and costs
of the education. It follows that customers in the selection of schools interested in
events, that the school organizes for students and parents, community, school trips, and
hobbies. Also, they are interested in a more favorable education prices than offered by
other schools, which means lower fees.
The surprise for us was, that the choice of schools for parents is greatly impressed by
the atmosphere of a school. Full or partial agreement on this point expressed 52
parents, which is 76%. The most important component of our research – school's
communication - was in the selection of a school the weakest point for the motivating
the customers and at the same time one of the least important, since compared to the
other components of the respondents identified as the least important. With
substantiality communication of the school in the selection of a school agreed
completely or partly 46%, while the total or partial disagreement was expressed by
31% respondents.
Marketing and Consumer Behavior 279
The importance of the components of
the marketing mix
offered services 40 15 10 21
additional servieces 31 14 17 0 6
school communicaton 13 19 15 9 12
priece of education 34 10 6 5 13
location of school 31 18 6 5 8
school atmosphere 28 24 10 4 2
I totally agree I agree I have no idea I don´t agree completely disagree
Figure 1. The importance of the components of the marketing mix
None of the schools that participated in our research currently implement advertising
and cooperation with the founder described previously at a lower level. And therefore in
these cases, it was not possible to expect other results, as shown in Figure 2 – low
effects of parents in the selection of a school in these items. We are also impressed, that
the performances to the public or incentive choice of a primary school for potential
customers as they parents express their views on public appearances as frequently
organized.
The importance of communication tools
for customers when choosing a school
Cooperation with the town / village 5 6 36 7 14
Public courses 9 14 21 8 16
competition 6 8 34 10 10
projects 9 11 35 5 8
Planned events with parents 18 14 18 10 8
Performances for the public 11 12 29 7 9
Open door day 29 17 5 4 13
School Website 21 24 11 3 9
School image ( reputation , reputation ) 31 19 11 6 1
Advertising (print , online, outdoor ... ) 8 10 28 5 17
I totally agree I agree I have no idea I don´t agree completely disagree
Figure 2. The importance of communication tools for customers when choosing a school
In terms of the effectiveness of promotional tools of the schools, are the events they
organize for parents when choosing a school, interesting planned actions for parents
280 Strategica 2016
totally or partially affected 20 respondents, which is 29 % of respondents. School's
website and open day achieve at the parents` similar results, the success in the fight for
the customers. 66 % of respondents were affected by the Internet school's
communication in a positive direction entirely or largely, and the same percentage of
them are interested in attending the open house presentation. Both communication
tools, therefore, consider it sought potential customers at attractive and particularly
effective in attracting school's customers.
Clearly, the most important for parents when choosing a school within our research,
became the school’s image. That creates a lot of features and is a communication tool
that basically covers all the instruments of communication mix, as the school’s image
considerably formation, but it may also change it or damage. For 74% of respondents
when choosing a school, fully or largely affect the image of the educational institution.
The lowest number of respondents, almost 10%, the school's image doesn't have any
meaning for the respondents when choosing a school for their child. Based on these
facts, we say that the image of the school is an extremely effective communication tool
for schools, helping it acquire new customers.
Conclusions
The aim of the research was to determine, how effective promotional strategies used by
primary schools for acquiring new customers are. In this subchapter, we present the
results of our research, based on the research questions set out at the beginning of the
research. School managers agree, that the reason, why parents should choose the right
school for your child, is the quality of services provided in connection with the
establishing a good relationship between the public and parents. Receptive and open
communication is, according to Deputy of a school, the key to reaching the customers.
Maintaining good relationship with the public, build up a positive image of a school and
raises awareness about the school, which can reach more potential customers.
The pressure of the educational market feels each of the elementary school that
participated in our research. This is because in their neighborhood are also other
primary schools, that have the same founder. They, therefore, have to fight for the favor
of the founder, while they are fighting for the number of scholars. The pressure of
educational market consisting in the fight for the student exists under the current
setting funding for education. Schools have commented, that they suffered from a lack of
the students, on the contrary, in the competition are quite successful (some less, other
more), on which, however, must make due to the account initiative. This pressure forces
the school improve its services and to invent a new and attractive strategy for customer
acquisition.
Most effective strategies for promoting the schools are public relations, direct marketing
and advertising and partly personal marketing. The most used tool of primary schools
to promote the school's activities, is open house presentation, various events, and
performances for the public or for parents, who are part of the public relations
marketing communication. An important element became even school's website.
However, there can be assigned as a work with the public, to direct marketing to
advertise and personal marketing. It depends on how and for what purpose the
information is given on the Internet. Ultimately, the public relationship appears to be
Marketing and Consumer Behavior 281
the most effective way to reach potential customers of the primary schools in which we
have made our research.
The school's services affected the most customers in the selection of a school. Based on
this finding, we can say, that the school's their marketing strategy oriented to quality, is
being implemented in the right direction. Effective for customer acquisition is an offer
of attractive additional services such as courses and hobbies, filling out the spare time
and also provide customers with a more affordable price of education in terms of
reducing financial expenditure. In additional, parents in choosing schools also taking
account in the atmosphere of the school. We think that the elements of the school's
marketing mix can work effectively within the marketing communications and primary
schools have many opportunities to stimulate them and satisfy many customers.
Forms of marketing communication what a potential customer is considering as
attractive, is important in a selecting of the school and encourage them to choose a
school, so that it becomes their ultimate choice, can be called effective. Opinions of the
current customers to communicate with the public schools and its presentation to the
public are mainly positive and parents think that school's communication is good.
Public relationships are according to the legal representatives the most important and
most significant components of the communication mix affecting them when choosing a
school. Therefore, activity with a public relations, that schools perform and appear to
them as most effective in attracting customers, seems to be a right choice. Parents also
at the choice of a school affects the school's website and most essential is, in their
opinion, school's image. To a large extent the expectations of potential customers were
met. Promotional activities such as Open house presentation, scheduled events for the
public and parents projects meets their expectations.
Acknowledgments: This paper was created as part of the project KEGA
no. 007UK - 4/2016 Preparation and development of terminology and
explanatory dictionary for school management courses training and
preparing senior teaching staff , followed by supplementing its
functionality in electronic - LMS Moodle.
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Marketing and Consumer Behavior 283
THE ACCEPTANCE OF MOBILE PAYMENTS IN THE GERMAN RETAIL
MARKET
Oliver SCHUSTER
Hof University
1 Alfons-Goppel-Platz St., 95028 Hof, Germany
oschuster@hof-university.de
Christine FALKENRECK
Hof University
1 Alfons-Goppel-Platz St., 95028 Hof, Germany
cfalkenreck@hof-university.de
Ralf WAGNER
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
rwagner@wirtschaft.uni-kassel.de
Abstract. The acceptance of mobile payments is one of the research challenges of high
strategic relevance in retailing. Most of the previous studies of mobile payment field focus
on consumers’ opinions, expectations and concerns to assess their acceptance of mobile
payment systems. The financial transactions’ complementing party–the merchants–who
also needed to accept and, therefore, to implement mobile payment technologies is
considered in this study. The purpose of this study is to enhance an existing research
framework, which already integrates the constructs user satisfaction and technology
acceptance, to fit better the mobile payment domain out of the retailer’s perspective.
Seizing this, we develop and test a new structural equation model linking between the
quality of the environment, economic benefits and application satisfaction with the
merchant’s use of mobile payment systems. Testing the conceptual framework by fitting a
structural equation model builds upon information obtained from 166 merchants
spreading all over Germany. We collected the information from the German retail sector,
which is indeed one of the most competitive and innovative in Europe, using a
quantitative questionnaire. Our findings have a significant impact on retailers’
application satisfaction and their system satisfaction of mobile payment technologies.
Complementing the results provide evidence that both satisfaction components have a
statistically significant and substantial impact on the merchant’s behavioral intention to
adopt mobile payment technologies. Summarizing, this study identifies antecedents,
drivers and barriers of actual mobile payment system use. All of our results are in line
with today’s state of the art technology acceptance literature but additionally highlight
retailers’ intention to use mobile payments. We conclude that German merchants still
have difficulties in assessing the economic benefits of adopting mobile payment
applications in general, but on the other hand, see significant benefits when comparing
mobile payment systems to other payment methods.
Keywords: mobile payment; technology acceptance; merchant adoption; TAM; user
satisfaction theory.
284 Strategica 2016
Mobile payment acceptance
Nowadays, mobile devices seem to be an integral part of customers’ contemporary life.
These devices are round-the-clock companions for the majority most of them. In
conclusion, it is not surprising that mobile technologies complement or even substitute
for conventional payment systems in the affluent economies (de Kerviler, Demoulin &
Zidda, 2016; Falk et al., 2016) and even among the poorest on the planet (Pervez,
Maritz & De Waal, 2013). The first mobile payment process worldwide was already
implemented in Spain 17 years ago (Mallat, 2007). The Spanish mobile operator
TeliaSonera implemented a system, where refreshing beverages could be bought from
a dispenser by using a mobile phone to conduct the payment. Noticeably today, Europe
is not leading this development anymore. Around the globe, for example in countries
such as Kenya, mobile payment systems are already established as an everyday
payment method – there are more than 14 million mobile payment users registered
(Safaricom, 2011) – as most Kenyans do not have a bank account due to the lack of
banks and ATMs, but own a mobile phone. This results in a mobile payment utilization
rate of almost 33 % based on Kenya’s total population.
Compared to Kenya, people living in Germany have ubiquitous possibilities to
withdraw cash or pay with credit card, which makes it hard for a new payment
technology to gain traction. On the other hand, the acceptance of mobile devices in
Germany already seems to be a foregone conclusion. Companies with a high level of
organizational innovation also improve their firm performance by utilizing e-business
technologies such as mobile payments (Soto-Acosta, Popa & Palacios-Marqués, 2015).
This might be the reason why the German retail sector has nevertheless started to
believe in and invest in the future of mobile payment systems. For example, Germany’s
largest grocery retailer EDEKA started to offer mobile payments in May 2013
(Zolnowski, Weiß & Böhmann, 2014). This indicates that mobile payment seems to
already be of great interest for the German retail sector. However, while there have
been many empirical studies conducted on the consumer side (e.g. Goeke & Pousttchi,
2010; Schierz, Schilke & Wirtz, 2010; Thair, Suhua & Peter, 2010; Hongxia, Xianhao &
Weidan, 2011; Slade, Williams & Dwivedi, 2013; Garret et al., 2014), there are only few
considerations of the retailer’s perspective. In line with Dahlberg, Mallat, Ondrus and
Zmijewska (2008) we argue that one can certainly not deduce the acceptance level of
mobile payment systems within the German retail sector knowing only one side of the
coin.
This paper will help to fill this gap in the research by proposing an integrated
framework to investigate retail mobile payment acceptance by combining the
Technology Acceptance Model (TAM), introduced by Davis (1989) and the User
Satisfaction Theory (US) introduced by DeLone and McLean (1992, 2003). We adapt
related constructs from the updated DeLone and McLean (2003) Information System
Success Model to gain a better fit to the mobile payment scenario and augment them
with external influence factors as suggested by Davis (1989), derived from Mallat and
Tuunainen’s (2008) prerequisites, drivers and barriers for successful mobile payment
merchant adoption. Consequently, the remainder of this paper is organized as follows.
In section two, we present the conceptual framework and develop hypotheses. In
section three, we discuss the descriptive results of the study whereas section four
comprises the model fitting, the results of the hypothesis tests and a discussion of
Marketing and Consumer Behavior 285
results. The conclusion, section five, provides the summary of contributions and
proposes promising topics for further research.
Conceptual framework and hypotheses
According to Stüber (2013), many different acceptance theories and models within
different research domains (e.g. Diffusion Theory, Information Systems, Business
Informatics, Marketing) try to explain the use of technical innovations (e.g., Davis,
1989; Davis, Bagozzi & Warshaw, 1989; Goodhue & Thompson, 1995; Venkatesh &
Davis, 2000; Venkatesh et al., 2003; Venkatesh & Bala, 2008; Venkatesh, Thong & Xu,
2012).
Recognizing that traditional technology acceptance models might be insufficient to
measure the acceptance of mobile technologies (such as mobile payments) and finding
that most technology acceptance models “study acceptance and use of technology in a
consumer context” (Venkatesh et al., 2012), this study attempts to build a new research
framework covering all aspects of retail mobile payment acceptance by combining a
variety of validated approaches.
We use Wilhelm’s (2012) set of antecedents for a successful research model adoption
and adjust it to fit mobile payments: [1] Validated theoretical base; [2] Collecting system
characteristics; [3] Ex-ante approach; [4] Considering social and hedonistic aspects. Both
models (TAM & US) fulfill requirement [1], as there are adequate amounts of empirical
validations found in the literature for both theories (King & He, 2006; Königstorfer,
2008; Stüber, 2013). In reducing the conceptual framework to just one theories school
of thoughts, we have to admit that both theories narrate “only one part of the story” as
mentioned by Wixom and Todd (2005). US theory explicitly deals with external factors
like system, application or information attributes, which is particularly suitable for
evaluating the system as such (Wilhelm, 2012). TAM theory pays insufficient attention
to those factors (Venkatesh et al., 2003; Benbasat & Barki, 2007), but is (in contrast to
US theory) well suited to predicting the actual usage of a system (Wilhelm, 2012;
Taylor, 2016) propose a combined research model consisting of TAM and US
constructs, which is useful as a prediction model and provides for system-specific
attributes as well. This approach would fulfill requirements [2] and [3] as well. The
combined model serves, as a solid ground to build upon, but still needs to be extended
manually to illustrate the specific circumstances within a mobile payment system and
to fulfill requirement [4]. In this case, we have substituted the constructs Information
Satisfaction and Information Quality with Application Satisfaction (AS), Quality of the
Environment (QE) and Economic Benefit (EB). The prerequisites, drivers and barriers
for successful mobile payment merchant adoption identified by Mallat and Tuunainen
(2008), partially replace the model’s original exogenous factors to assure the best
possible fit to the mobile payment scenario (see figure 1).
286 Strategica 2016
Figure 1. Combined and extended US/TAM-Model
The construct Attitude towards Use (ATU) measures the merchant’s attitude towards
the actual use of mobile payment systems. The original TAM implies that ATU strongly
influences the Behavioral Intention to Use (BI) (Dishaw & Strong, 1999; Slade et al.,
2016), we argue:
H1: A positive ATU of mobile payments influences the merchant’s BI to use mobile
payments positively.
According to Davis et al. (1989), the construct Perceived Usefulness affects ATU as well
as BI.
H2a: A positive PU of mobile payments influences the merchant’s ATU positively.
H2b: A positive PU of mobile payments influences the merchant BI positively.
Another impact on ATU and PU is expected by the construct Perceived Ease of Use
(PEOU).
H3a: A positive PEOU influences the merchant’s ATU positively.
H3b: A positive PEOU influences the merchant’s PU positively.
The construct System Satisfaction (SS) adopted from the US-Theory measures the
“object-based attitude” of the user directly referred to a single system or a technology
(Wixom & Todd, 2005). In this paper, the newly developed construct Application
Satisfaction (AS) is used, as the core feature of a mobile payment system is related to
the processing of payment transactions - an “application”:
H4a: If a merchant is satisfied with a mobile payment system, PEOU will be influenced
positively.
H4b: If a merchant is satisfied with a mobile payment system, AS will be influenced
positively.
We postulate that the construct AS has a direct influence on the PU of a merchant since
it replaces the original construct Information Satisfaction which, according to Wixom
and Todd (2005), should have an influence on PU.
H5: If a merchant is satisfied with the mobile payment application, PU will be influenced
positively.
Marketing and Consumer Behavior 287
In the User Satisfaction research, DeLone and McLean (2002) describe the two
constructs of System Quality (SQ) and Information Quality as the most important
influence factors on user satisfaction. We replace the construct Information Quality
from DeLone and McLean (2002) with our own constructs Quality of the Environment
(QE) and Economic Benefit (EB). We postulate that EB links to both AS and SS, as we see
economic factors affecting the application mobile payment as well as SS directly.
H6: A high QE will influence AS positively.
H7: A high EB will influence AS positively.
H8: A high EB will influence SS positively.
H9: A high SQ will influence SS positively.
Descriptive analysis
Data collection was conducted during four weeks in October and November 2013, in all
German federal states. The standardized paper questionnaires were personally
distributed to stationary merchants (sample size n=166) but not assisted by an
interviewer. This leads to an increased objectivity of the study as no interviewer adds
subjective influences (Hilgert, Kroh & Richter, 2016; Loosveldt & Beullens, 2014).
Commercial sector, company size and turnover
A total of 36 % of the participants were owners of clothing stores, 17 % of grocery
stores, 13 % of sports shops and the remaining 34 % divided into optics, flowers,
stationery, jewelry, and home and fabric goods. Nearly 65 % of all respondents
described their business to be a specialty store, 24 % are full-range suppliers, 7 % are
running a concept store and the remaining 4 % are discounters. Regarding the annual
turnover, 63 % of the retailers classified themselves as a smallest sized enterprise with
an annual turnover not greater than two million Euro. Further, 19 % of the merchants
rate themselves to be in the category of a small sized enterprise with an annual
turnover up to ten million Euro. Medium sized enterprises with an annual turnover not
more than 50 million Euro (8%) and large-sized enterprises with more than 50 million
Euro annual turnover (11%) are the smallest case groups with respect to the company
size within our survey.
Payment methods and mobile payment awareness
As one would expect, every single merchant offers cash payments, whereas around
12 % offer cash as their only payment option. Since electronic cash (EC)–a German
debit card system–is still much more popular in Germany in contrast to credit cards, it
is not surprising that around 84 % of all retailers offer electronic cash payments
whereas only 54 % accept credit cards. Another German particularity, the Geldkarte –
which can be best described as stored-value card – is accepted in 10 % of the stores.
Only a negligible amount of 3 % offer mobile payments. Interestingly, almost 90 % of
all participants stated that they are not planning to offer further payment options in
the near future. The other 10 % indicated their plans to offer EC- or credit card
payments, but only 3 % plan to offer mobile payments in future. This might be due to
the lack of awareness towards mobile payments, as only 53 % of the participants have
heard the term “Mobile Payment” before. Broken down further, it seems that only
12.5 % of this subgroup know what mobile payments are.
288 Strategica 2016
The future of mobile payments
Once we ascertained that the concept “Mobile Payment” is not widely spread among
German and even European (Apanasevic, Markendahl & Arvidsson, 2016) retailers, we
tried to provide all participants with the same knowledge about mobile payments and
evaluated again, if merchants would be willing to offer mobile payments in future, once
they have learned, what mobile payments are. Still, only 28 % of the respondents can
imagine offering mobile payments in future. Around 23 % are still unsure, 46 % are
sure that they will not offer mobile payments in the near future and the remaining 3 %
already offer mobile payments as a payment option in their stores.
Results
SEM quality criteria
We adopted the US scales for our own constructs and added Mallat and Tuunainen’s
(2008) exogenous influence factors (see figure 1). The survey measured all items (see
table 1) on a six-point Likert scale. In this study, QE, EB, and SQ are formative
constructs and all other constructs were designed as reflective constructs. SmartPLS
3.0 (Ringle, Wende & Will, 2013) was used to test the hypothesized relationships via
structural equation modeling (SEM). Bootstrapping was conducted to derive the inner
models t-values and significances of the path coefficients. Additionally, we used the
blindfolding approach to receive cross-validated communality and redundancy indices
(Tenenhaus et al., 2005).
Table 1. Items
Construct Items
Quality of the - Wide proliferation of mobile technologies is an important
Environment (QE) prerequisite for mobile payments.
(formative) - Mobile payments underlie a low risk concerning data security.
- There is a need for alternative payment systems in the German
retail sector.
Economic Benefit (EB) - Offering mobile payments increases impulse purchases.
(formative) - Offering mobile payments has a positive impact on the corporate
image.
- Offering mobile payments enables merchants to reach new
customer groups.
System Quality (SQ) - Mobile payment systems work reliably.
(formative) - Mobile payment transactions can be easily integrated into existing
payment systems.
Application Satisfaction - Overall, the interaction with mobile payment systems seems to be
(AS) (reflective) very good.
- The use of mobile payment increases the productivity of the
payment transaction.
System Satisfaction (SS) - Overall, I think I would be very satisfied with a mobile payment
(reflective) system.
- Mobile payment transactions are more fun than those of other
payment systems are.
Perceived Usefulness (PU) - The application benefits of mobile payment systems can be
(reflective) overall considered as very good.
- Overall, mobile payment systems are of high quality nowadays.
Marketing and Consumer Behavior 289
Perceived Ease of Use - I think that mobile payment is easy to use.
(PEOU) (reflective) - It is easy for cashiers to learn how to use a mobile payment
system.
Attitude Toward Using - I think it is a good idea to offer mobile payment to my customers.
(ATU) (reflective) - Compared to other payment methods, mobile payment is a good
alternative.
Behavioral Intention to - I will offer mobile payment in future.
Use (BI) (reflective) - I will handle all payment transactions via mobile payment in
future
Both the formative and reflective constructs show acceptable quality criteria and therefore an
acceptable level of reliability such as the Average Variance Extracted (AVE) ≥ 0.5 (Fornell &
Larcker, 1981; Hair et al., 1998), composite reliability ≥ 0.7 (Nunnally, 1978), R² (moderate) ≥
0,33 (Chin, 1998), Cronbach’s α ≥ 0.6 (Nunnally, 1978) and communality as well as redundancy
for endogenous constructs > 0 (Chin, 1998). Supplementary data appears in Table 2.
Table 2. SEM quality criteria
Composite Cronbach’s
Construct AVE R Square Communality Redundancy
Reliability Alpha
Application Satisfaction
0.823 0.903 0.573 0.785 0.419 0.459
(AS)
Attitude Toward Using
0.781 0.877 0.452 0.719 0.318 0.340
(ATU)
Behavioral Intention to
0.902 0.948 0.409 0.891 0.597 0.356
Use (BI)
Economic Benefit (EB) 0.250
Perceived Ease of Use
0.759 0.862 0.347 0.688 0.273 0.250
(PEOU)
Perceived Usefulness
0.737 0.848 0.435 0.652 0.226 0.300
(PU)
Quality of the
0.070
Environment (QE)
System Quality (SQ) -0.019
System Satisfaction
0.726 0.841 0.612 0.623 0.190 0.434
(SS)
Results of the hypotheses
Figure 2 displays highly significant path correlations (p≤0.001) for almost all paths, except from
EB to AS. The results show that as expected, ATU has a positive effect on BI (0.468, t-value
7.217). Hypothesis H1 is supported. Evaluating the prediction power of PU, we find that although
both links are highly significant (p≤0.001), the link between PU and ATU (0.379, t-value 4.831) is
slightly stronger than the link between PU and BI (0.238, t-value 3.180). The results support
both hypotheses, H2a and H2b. The impact of PU and ATU explains around 41% of the variance of
BI (R²=0.409).
290 Strategica 2016
Figure 2. Results
Checking the links between the constructs PEOU and ATU (0,377, t-value 4.664) and
PEOU and PU (0.329, t-value 3.904) we find moderate effects on both edges, supporting
our hypotheses H3a and H3b. With the measured impact of PU and PEOU, we were able
to explain around 45% of the variance of ATU (R²=0.452).
Taking a look at the initial results from the US models confirms our expectations
regarding the interaction between the two constructs SS and PEOU, as they strongly
correlate (0.589, t-value 10.466). The expected effect from SS to the adapted AS-
construct (0.374, t-value 4.013) is lower than expected but still with a moderate effect
and highly significant (p≤0.001). As a result, hypotheses H4a and H4b are also
supported. The assumed positive effect of AS on PU (0.401, t-value 5.067) can also be
confirmed, in line with H5, which is supported. The SS-construct explains around 35%
of the variance of PEOU (R²=0.347). The newly introduced construct AS even explains
around 44% of the variance of PU (R²=0.435).
The next adapted construct QE was expected to have a positive link to AS, which can be
confirmed in our findings (0.300, t-value 3.778), though the effect seems to be weak.
Still, hypothesis H6 is supported. Regarding hypothesis H7 we expected an impact from
EB to AS, which could not be confirmed in our results (0.174, t-value 1.711) and lacks
statistical significance (p=0.093). As the link is non-existent, hypothesis H7 must be
rejected. Surprisingly, the impact of EB on SS is significantly higher (0.596, t-value
12.924) and strongly correlated. Hypothesis H8 can be supported. The last relationship
we checked was the effect of SQ on SS (0.320, t-value 5.675), which showed a moderate
positive effect and supports hypothesis H9. The adapted constructs QE and EB explain
around 57% of the variance of AS (R²=0.573) whereas QE alone already explains
around 56% of the variance (R²=0.559). The two constructs EB and SQ explain more
than 61% of the variance of SS (R²=0,612).
The results of the statistical hypothesis tests show that eleven out of twelve
hypotheses are supported. As expected, our three constructs QE, EB, and SQ, built with
and derived from Mallat and Tuunainen’s (2008) prerequisites, drivers and barriers,
were well chosen as they predict more than half of the variances of the two important
(and partially adapted) US constructs AS and SS. In both cases, we found highly
significant path correlations between these constructs. As for the rest of the TAM and
Marketing and Consumer Behavior 291
US constructs, the results are in line with today’s state of the art technology acceptance
literature. A complementary list of all measured indirect effects can be found in the
appendix.
Surprisingly, the construct EB lacks a statistically significant link to AS, as we initially
expected. This leads to the conjecture that German merchants see no economic benefit
in using mobile payment applications in general, but rather see significant benefits
when comparing mobile payment systems to other payment methods.
Conclusion, limitations and future research
This study examines the acceptance of mobile payments out of the retailers’
perspective. Our starting point was, that most of the previous research deals with
consumer opinions and acceptance of mobile payment systems (Dahlberg et al., 2008),
the second necessary user in the German retail sector—the merchant—who is also
needed to accept (and then to offer) mobile payments is considered here. To measure
retailer’s acceptance of mobile payment, systems we created an integrated framework
that fills a long-term research gap and can easily be extended to other countries’
markets. The framework consists of a combination of the TAM and US theory and
enables to highlight retailers’ intention to offer and use mobile payments.
Although this seems to be a good starting point for future research in this domain, the
results of this study should be taken cautiously. First, the sample size comprising of
n=166 participants is comparatively small. Second, the level of knowledge concerning
mobile payments among the participating retailers was relatively low although we
tried to provide the same knowledge to all participants. In particular, German retailers
turn out to be less familiar technologies widely accepted in other markets such as
mobile micro payments that might be adopted from Base-of-the-Pyramid markets
(Zulauf et al., 2015) or blockchains (Massacci, Ngo & Williams, 2016) that might be
adopted electronic business.
Since the German retailers’ knowledge of these well-established technologies turns out
to be low, experimental investigations seem to be promising venues for further
research.
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APPENDIX
Table 3. Indirect effects
Path
Impact of Via on t-value p-value
coefficient
AS PU ATU 0.152 3.086 0.002
AS PU ATU BI 0.071
AS PU BI 0.095
AS BI 0.166 3.220 0.001
EB SS AS 0.223 3.894 0.000
EB AS PU ATU 0.026
EB SS AS PU ATU 0.034
EB SS PEOU PU ATU 0.043
EB SS PEOU ATU 0.132
EB ATU 0.235 6.265 0.000
EB AS PU ATU BI 0.012
EB AS PU BI 0.017
EB SS AS PU ATU BI 0.016
EB SS AS PU BI 0.021
EB SS PEOU ATU BI 0.062
EB SS PEOU PU ATU BI 0.020
EB SS PEOU PU BI 0.027
EB BI 0.175 5.555 0.000
EB SS PEOU 0.351 7.836 0.000
EB AS PU 0.070
EB SS AS PU 0.089
EB SS PEOU PU 0.115
EB PU 0.274 6.664 0.000
PEOU PU ATU 0.124 3.479 0.001
PEOU ATU BI 0.176
PEOU PU ATU BI 0.058
PEOU PU BI 0.078
PEOU BI 0.312 6.190 0.000
PU ATU BI 0.177 3.983 0.000
QE AS PU ATU 0.046 2.161 0.031
Marketing and Consumer Behavior 295
QE AS PU ATU BI 0.021
QE AS PU BI 0.029
QE BI 0.050 2.119 0.034
QE AS PU 0.120 2.665 0.008
SQ SS AS 0.120 3.264 0.001
SQ SS AS PU ATU 0.018
SQ SS PEOU PU ATU 0.024
SQ SS PEOU ATU 0.071
SQ ATU 0.113 3.956 0.000
SQ SS AS PU ATU BI 0.009
SQ SS AS PU BI 0.011
SQ SS PEOU ATU BI 0.033
SQ SS PEOU PU ATU BI 0.011
SQ SS PEOU PU BI 0.015
SQ BI 0.079 3.707 0.000
SQ SS PEOU 0.189 4.744 0.000
SQ SS AS PU 0.048
SQ SS PEOU PU 0.062
SQ PU 0.110 3.991 0.000
SS AS PU ATU 0.057
SS PEOU PU ATU 0.073
SS PEOU ATU 0.222
SS ATU 0.351 6.664 0.000
SS AS PU ATU BI 0.027
SS AS PU BI 0.036
SS PEOU ATU BI 0.104
SS PEOU PU ATU BI 0.034
SS PEOU PU BI 0.046
SS BI 0.247 5.774 0.000
SS AS PU 0.150
SS PEOU PU 0.194
SS PU 0.344 6.346 0.000
296 Strategica 2016
THE EFFECT OF MICROFINANCE ON JORDANIAN WOMEN’S SOCIOECONOMIC
EMPOWERMENT AND MARKETING PRACTICES
Motteh S. AL-SHIBLY
Amman Arab University, Amman, Jordan
2234 Jordan St., Mubis, Amman 11953, Jordan
sh_motte3@yahoo.com
Reem M. ALREFAI’
Princess Sumaya University for Technology
1438 Khalil Sket St., Al-Jubaiha, 11941, Amman, Jordan
reemalrefai@gmail.com
Abstract. The empowering woman is a tool to ensure development in the Jordanian
economy, especially in poor regions. The aim of this study is to shed some light on the role
of microfinance as part of economic factor social factors and marketing practice's effect
on Jordanian women empowerment and development. A Purposive sample of 100 women,
due to the arbitrary distribution of a sample study; from different governorates was
examined through personal interviews conducted with them, followed by a discussion of
the main implications of each factor. Changing mentalities, self-awareness, skills
enhancement, increase self-confidence and improving marketing practices through
training and education using different mechanisms such as seminars, lectures ,Facilitate
the procedures for obtaining financial support for the construction of projects to ensure
the improvement of their financial situation, in particular, and moving the wheel of the
Jordanian economy in general.
Keywords: microfinance; socioeconomic empowerment; marketing practices; Jordanian
women; Jordan River foundation (JRF).
Introduction
Women are just as capable of success as men. Women in Jordan have made great
strides in educational and political achievement over the past generation. However,
many challenges face the Jordanian women political, social and economic status based
on social, family attitudes, traditional, cultural and religious values about what women
and men's roles are.
Over the last decade, the Millennium Development Goals (MDGs), in particular, Goal 3 –
“to promote gender equity and empower women”, have stimulated increased attention
to poor women’s socioeconomic empowerment in a range of sectors from formal
employment to outsourcing, small business, petty trading and informal, home-based
income generating activities (Jones et al., 2008; Esplen & Brody, 2007).
Marketing and Consumer Behavior 297
According to the State of the Microcredit Summit Campaign 2001 Report, 14.2 million
of the world’s poorest women now have access to financial services through
specialized microfinance institutions (MFIs), banks, NGOs, and other nonbank financial
institutions.
These women account for nearly 74 percentage of the 19.3 million of the world’s
poorest people now being served by microfinance institutions. (The Microcredit
Summit Campaign defines poorest as the bottom half of those living below their
nation’s poverty line).
The importance of studying the dynamics of female empowerment grew over the last
years in line with real economic trends. Despite this growing attention and its impact
on the world economy, the body of studies on women entrepreneurs still needs to
grow (Ahl, 2006; De Bruin et al., 2006, 2007; De Vita et al., 2014). The Europe 2020
Strategy — the EU’s key document for smart, sustainable and inclusive growth — has a
headline target to raise the employment rate for women and men aged from 20-64 to
75 % by 2020 (Report on Progress on Equality between Women and Men in 2010, the
gender balance in business leadership, p.4).
Importance of the study
This study takes the lead to study the socioeconomic empowerment of Jordanian
women and their marketing practices with reference to the impact of microfinance. It
examined the extent to which funding micro projects have proven to improve the
socioeconomic standards of living for women and their families. Hence, development
of any society requires that each able individual, male or female, be a productive and
active contributor to the advancement of his or her society (Olaimat & Al-Louzi, 2008).
The purpose and goal of the study
The purpose of this study is to understand the concept of socioeconomic
empowerment by which Social empowerment is understood as the process of
developing a sense of autonomy and self-confidence, and acting individually and
collectively to change social relationships and the institutions and discourses that
exclude poor people and keep them in poverty (Blomkvist, 2003). Economic
empowerment is thought to allow poor people to think beyond immediate daily
survival and to exercise greater control over both their resources and life choices.
There is also some evidence that economic empowerment can strengthen vulnerable
groups’ participation in the decision-making. For example, microfinance programs
have been shown to bolster women’s influence within the household and marketplace
(Eyben, Kabeer & Cornwall, 2008). Moreover, it is relevant to understanding the role of
marketing practices in empowering women socially and economically.
The main goal of this study is to improve women abilities to make appropriate
decisions, self-confidence, and increased independence as there have been trends of
women that do not have a chance to prove themselves in the community, especially in
poor regions. Therefore, aspects taken in this study related to women socioeconomic
empowerment refers to women financial ability and marketing capabilities to set up
their own projects expand it and improve it in addition to the women who faced
difficulties to get out of their homes because of social pressure.
298 Strategica 2016
Jordanian women socioeconomic empowerments
In all societies, women are the bedrock of families and a crucial element in achieving
progress. Women in Jordan are participating more and more in all aspects of civic life.
Additionally, Jordanian women have for a long time been prominent in the private
sector and now are taking more advantage of enhanced business opportunities and
public sector initiatives designed to encourage female entrepreneurs. All of these
developments show Jordan’s confidence in the ability of women to achieve positive
change. This is partly due to a substantive regional campaign and the institution we, in
Jordan, launched to encourage socio-economic and political participation of women.
(Her Majesty Queen Rania Al Abdullah, July 23, 2005).
Current Jordanian labor laws and regulations embody both positive and negative
provisions for women. Indeed, some of the laws originally intended to protect women
have actually had an adverse impact on women's economic participation. There are
widely varying estimates of women’s participation rates in the economy, all of which
indicate low economic participation levels. Estimates range from 12% -26%,
depending on the source of information (The Economic Advancement of Jordanian
Women: A Country Gender Assessment, 2005).
Nevertheless, we cannot deny the Jordanian government's efforts in cooperation with
human rights organizations to reduce the proportion of Gender discrimination and
increase participation rates of women in the labor market despite the scarcity of this
resource-poor country, but it relies heavily on its human capital.
Jordan’s illiteracy rate remains among the lowest in the Arab world, with 9.1 % of
residents aged above 13 classified as illiterate, according to the 2015 Population
Census. The survey showed that the illiteracy rate varies between citizens and non-
Jordanians, standing at 6.7 per cent and 14.5 per cent respectively (Azzeh, 2016). Adult
women in Jordan are still less educated than men, but gender disparity in educational
attainment is quickly disappearing among younger cohorts. (Majcher-Teleon & Ben
Slimène, 2009, p.3).
Results in 2016 disclosed that the illiteracy rate among Jordanian females amounted to
8.9% compared to 4.6 among Jordanians males. The results also indicate that the
lowest level of illiteracy has been among the individuals who are age (13-19 years)
increased by 1.7% among males and 1.5% among females. These ratios increased with
advancing age that reached its highest level of 17.9% males and 48.9% among females.
This is an indication of the direction of the future decrease in these ratios end of this
generation, which contributes to the high illiteracy rates in the present time, as shown
in figure (1) (The Department of Statistics, 2016).
Marketing and Consumer Behavior 299
Figure 1. The illiteracy rate among Jordanians individuals aged 13 years and over by age
and sex groups, 2015 (The Department of Statistics, 2016)
Despite improving levels of educational attainment in Jordan, the unemployment rates
increased by 0.6 percentage points during the First quarter of 2015 compared with the
fourth quarter of 2014. Taking gender into consideration, it becomes clear that the
Unemployment Rate has increased for males by 0.1 percentage points and for females
increased by 3.0 percentage points in the 1st quarter of 2015 compared with the
fourth quarter of 2014 (Department of Statistics, 2015).
The growing educational attainment levels of women and the high rates of female
unemployment and non-participation in the labor market have led to a serious waste
of resources invested in women’s education. (Majcher-Teleon & Ben Slimène, 2009).
There has been a great deal of research and many studies on the socioeconomic
benefits of women’s economic empowerment. Women participation in economic
activity brings benefits at both micro and macro levels. At a macro level, a positive
correlation can be observed between female labor force participation rates and
economic growth. At the micro level, the labor force participation of women is
beneficial for the welfare of the family (in areas such as income, health and children’s
education). Comparative studies examining the impact of female education on GDP
(gross domestic product) and poverty reduction demonstrate positive effects (World
Bank, 2004). Education and skills enhance the productivity of both women and men
and increase their opportunity for paid employment in the formal sector.
Marketing practices
According to several academics, firms are now emphasizing the retention of customers
and the management of relationships, which extend beyond the buyer-seller dyad to
include partners through the value chain. (Day & Montgomery, 1999; Morgan & Hunt,
1994; Webster, 1992). A basic goal of social science is to provide a theoretical
explanation for behavior .In marketing, this goal includes attempts to explain the
behavior of consumers , salespersons and others involved in discipline related
300 Strategica 2016
activities (Peter, 1981) the relational view of marketing has evolved from efforts by
both business to business and services scholars to differentiate the marketing
practices by the nature of the customers served or product offered, however, there are
also theoretical developments pertaining to consumer markets and goods firms, thus
extending the relevance of relationships across different contexts (Pels, 1999; Sheth &
Parvatiyar, 1995).
Gronroos (1991) and Webster (1992) suggest that marketing is characterized by
multiple complex processes manifested in four different aspects of marketing
practices: 1 - Transaction marketing: managing the marketing mix to attract and satisfy
customers; 2 - Database marketing: using technology based tools to target and retain
customers; 3 - Interaction marketing: developing interpersonal relationships to create
cooperative interaction buyers and sellers for mutual benefit; 4 - Network marketing:
developing interfere relationships to allow for coordination of activities among
multiple parties for mutual benefit, resources exchange and so forth. The best
implementation of these practices influences the success or failure of any project,
which indeed leads to social and economic empowerment. For this study, we will focus
on the acquirement of marketing skills and capabilities for woman needed to
implement best practices and strategies (pricing, product development, placing and
promoting) regarding products in order to improve and expand their businesses. One
of the most critical challenges was finding adequate data related to marketing
practices in Jordan either for males or females, through an extensive study and
research on this issue, most of the institution's programs categorized in incubations,
communication networks, consultation and entrepreneur training (common data
about entrepreneurs).
Jordan River Foundation (JRF)
JRF, which is chaired by Her Majesty Queen Rania Al Abdullah, founded in 1995, a
Jordanian non-governmental & non-profit organization. Main programs: The Jordan
River child protection program, Jordan River program to enable local communities.
Values: Social Justice, Sustainability, Participation, and Responsibility.
Work approach: the Foundation initiated to launch multiple social and economic
projects for women; it aims to provide employment opportunities that would improve
the ways of life
In conjunction with this, these projects are working to strengthen women's knowledge
and skills in the production of traditional handicrafts, as well as entrepreneurial skills.
In addition, it succeeded this kind of initiatives benefit thousands of individuals,
directly and indirectly, and continues to this day to improve the sources of income for
local communities and families vulnerable in various parts of the Kingdom. The
Foundation managed during the last twenty years the training and empowerment of
23,373 women and young women in a variety of areas of awareness and the provision
of productive work opportunities for 4083 women.
Jordan River program to enable communities: It is a key enterprise program and which
embodies the commitment to sustainable human development through the
implementation of numerous projects aimed at empowering local communities, to
contribute to the creation of economic opportunities and improve the standard and
Marketing and Consumer Behavior 301
quality of living, and that by rearranging the resources of nature and the human and
economic at the local level. Practical method adopted in the implementation of
development projects and interventions in the Jordan River program to enable
communities includes the following main activities:
- The formation of community committees and communication;
- Awareness, training, and capacity building;
- Definition of communities and identifies development projects;
- Registration and the institutionalization of the local cooperative societies;
- Implementation of development projects.
The result of such a method is sustainable projects managed by the local community
through the Administrative Committee on Cooperative Association democratically
elected.
Located community empowerment program interventions in the following categories:
- Comprehensive Rural Development;
- Empower women economically;
- Youth empowerment;
- Enable and support the local community bodies;
- Strategies, consulting and lobbying;
Methodology
This section deals with a description of the study community, tool, variables (the
independent and dependent) and model.
Study Approach
This study is based on the descriptive approach to identify the role of microfinance and
marketing practices in the empowerment of Jordanian women socially and
economically. This approach is based on the interpretation of the status quo by setting
conditions and dimensions and characterization of the relationship between them in
order to reach a scientific and accurate description of the problem.
Society and the study sample
We tried to track down a comprehensive list of support opportunities for female
entrepreneurs that would form the basis of this study. As mentioned before,
undertaking research in less developed environments is not easy and data collection
usually represents the biggest challenge (Ramadani et al., 2013a; Dana & Ramadani,
2015). The lack of systematic data collection is a typical characteristic of the Middle
East and an impediment to carrying out deeper quantitative analysis of official data.
Most of the data is either fragmented or incomplete, in such cases, it is appropriate to
select the Purposive sample. Accordingly, we have to understand women points of
view with deep understanding to their beliefs, behaviors, and experiences; we tried to
track down a comprehensive list of successful stories from the Jordan River
Foundation. The study population consisted of 27456 women worked with JRF,
provided with financial and training support to open a new business or for
development and enlargement, interviews with 100 women from different provinces
302 Strategica 2016
in Jordan with the small business such as (needlework, Beauty salon, Hand Crafts,
home cooking…etc.)
The study tool
As this study was qualitative and descriptive in nature, we conduct extensive
interviews with open-ended questions, to investigate the reasons behind a woman's
chance to prove themselves in the community especially in poor regions. The study
Questions consisted of three parts as follows:
- part one: the questions were about the demographic characteristics (Age, Marital
Status, Educational Level, Monthly Income/JD);
- part two: information about the business and Programs offered from JRF (the nature
of the work, Sources of funding, types of programs carried out by the Foundation,
feasibility study, pricing criteria, promotion and improvement ability , distribution
limitations and availability);
- part three: questions for women about the relation between variables (the aim that
women want to reach from opening this project, the impact of the project economically
and socially, the value of the loan that she got, the social obstacles facing women,
needed training programs).
The study model
Independent variables: marketing practices, social effects, and economic effects.
Dependent Variable: socioeconomic empowerment.
Figure 2 illustrates the components of each variable.
Figure 2. The women socioeconomic empowerment
Marketing and Consumer Behavior 303
Results
Part one: Table 1 illustrates the results derived from the interviews.
Table 1. Demographic characteristics of female entrepreneurs
Variables %
Below 25 8.0
26-30 28.0
Age
31-35 28.0
36-40 30.0
41 and above 6.0
Marital Status Married 64.3
Unmarried 16.7
Widow 12.0
Separated 3.3
Divorce 3.7
Educational Level Illiterate 11.0
Primary 23.0
Secondary 75.0
Bachelor 40.0
Master 35.0
Diploma 17.0
Monthly Income/JD Below 400 42.0
450-600 65.0
601-800 33.0
Above 801 12.0
As shown in the table( 1 ), more than 64% of the sample are married and benefits from
the foundation programs in order to enhance their living standards , to cope with the
economic inflation, and more important to nurture their children’s. 40 % with a
bachelor degree
Part two:
- The nature of the work: Most of the work areas were in the production of domestic
food, embroidery, agricultural work and work in the field of accessories.
- Sources of funding: Most women received financial loans from associations working
with JRF, NGOs grants, loans do not exceed 500 JD.
- Types of programs carried out by the Foundation: Feasibility study, awareness-
raising activities in public and private issues and the most important JRF was a key
factor to attend men’s parenting sessions, awareness and self-empowerment,
children's summer and winter clubs, regarding marketing practices mostly, were about
promoting the products in showrooms, galleries, and bazaars.
- The most important results that have been reached during this study that most of the
ladies on the proposed sample left without marketing skills and capabilities necessary
for the success and expand their enterprises and thus achieve an acceptable return.
Table 2 illustrates the results derived from the interviews.
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Table 2. Marketing results
-Most of the women lack designing skills, which leads into essential
creativity issues such as Packaging
-No evidence of using customer’s feedback in order to improve and develop
Marketing the product.
practices -Difficulties in pricing products compared to competitors with no evidence of
using pricing strategies.
-Distribution of the products is limited in certain areas; there is no access to
new markets such as malls in spite of the product quality.
Part three:
The aim of opening this project, the economic and social impact, the value of the loan:
the results illustrated in Table 3.
- The social obstacles facing women: Social factors such as women mobility or freedom
of movement, freedom from violence, control over choosing a spouse, control over age
at marriage, access to education, access to skills and information, inequalities in
decision-making power within the household.
- Needed training programs: Most of the women agreed upon the need for marketing
and social media training, self-awareness and self-confidence sessions, managerial and
feasibility training programs.
Table 3. The social & economical results
Social effects Economic effects
-Working from home gives them the chance to take -Receiving loans and attending workshops
care of their family members and nurture their on small business management helps
children in a proper way. women to turn their business into a self-
sufficient company that benefits both their
-Higher income because of women's work families and the community around them.
contributed to the improvement in social and
educational status for family members. -Intense use of technology in order to
improve the quality of their work, hence
-The abundance of money encouraged some maximizing profitability
women to complete their secondary education as
well as their higher education. -Better purchasing practices for raw
materials and production equipment.
-Social networks were improved, which leads to
enhancing women self-confidence and self-esteem. -Work expansion contributed to providing
employment opportunities for other women,
- Improvements in the health status of the families. hence reducing poverty levels in the same
region.
Discussions and conclusion
The literature on economic empowerment is vast, and a large part of this focuses on
the economic empowerment of women – a key strategy for addressing gender
inequality. More generally, the discourse on economic empowerment centers around
four broad areas: A- the promotion of the assets of poor people; B- transformative
forms of social protection; C- microfinance; and D- skills training (Eyben, 2008). Thus,
the main findings of this study were as follows:
- There is a positive relation between empowerment and the marketing function, as it
is considered a core organizational function, which is responsible for communicating
Marketing and Consumer Behavior 305
the organization's services and products to its markets in order to generate customer
request. The activities of this core function include promotion, advertising, developing
and pricing (Slack et al., 2011).
- Empowerment of women means acquiring the power to think, acting freely,
developing a sense of self-worth, a belief in one’s ability to make desired changes and
the right to control one’s life, exercise choice, bargaining power, and fulfilling their
potentiality as equal members of society. Generally, empowerment is any process and
activity by which women control their lives.
- Women empowerment and economic development are closely related in many
directions, economic development can play a major role in driving down inequality
between men and women. The economic empowerment of women is being regarded
these days as a sine qua none of the progress for a country; hence, the issue of
economic empowerment of women is of paramount importance to political thinkers,
social scientist, and reformers. Without women development, economic development
will not take place. (Parmanandam & Packirisamy, 2014).
Therefore, empowering women effectively mean working on the development of any
society, through increasing self-reliance and asserting their independence right to
make choices and control resources. (Nikkhah et al., 2011).
As mentioned earlier the effects of microfinance on women financial independence
were tested. However, it was determined that microfinance has a limited effect on
women empowerment. (La Rocque, 2015, p.32), due to the fact that eastern man
generally does not accept the idea of equality between the two genders. Consequently,
the methodology was qualitative in nature by which the social characteristics and
marketing practices considered one of the most important aspects of this study. So it’s
time to change this mentality that is why We believe if women get support in a proper
way through training ,education, and flexible access to financial support women will be
more self-confident and prove themselves in various aspects of life. Nevertheless, there
is a noteworthy distinction in the level of social and financial strengthening than ever
before, after the joining of NGOs among the respondents. It is clear that the NGOs affect
the social and financial strengthening of women.
There are several small loan and microfinance programs that specifically encourage
women’s economic participation (Committee on the Elimination of Discrimination
against Women, 2010). This is the first research of its kind linking marketing practices
and the empowerment of women, as it is an add scientific value in the field in terms of
clarifying social and economic dimensions that contribute to access empowerment. an
important implication of this research is to follow-up and evaluates funded projects in
order to achieve sustainability through enhanced training programs and seminars.
Recommendations and limitations
Firstly, handling any project requires extensive training in managerial and marketing
fields, global competition requires women to be more creative and innovative in
dealing with customers’ satisfaction. Secondly, facilitate the procedures for obtaining
financial support for the construction of projects to ensure the improvement of their
financial situation, in particular, and moving the wheel of the Jordanian economy in
general. Thirdly, essential work is needed to break down the social limitations and
306 Strategica 2016
increase women's awareness about their role, in order to make a sustainable impact in
the community, utilizing the power of social media.
Furthermore, we recommend other scholars to booked adequate time for interviews,
as they need to meet different women from different areas in order to gain sufficient
information needed to build a comprehensive research. Future research directions
could be about skills enhancement and women empowerment, education and
independence, the number of micro-funded projects in Jordan for different
genders…etc.
The first limitation is related to the creation of our sample. We faced difficulties in
obtaining sufficient information about the study sample. The second limitation was the
qualitative nature of this study due to the lack of systematic data related to our study;
moreover, conducting extensive personal interviews was a bit challenging due to
difficulties to interview some of the women in private for religious and social reasons.
Geographic factors some women found in remote areas difficult to access.
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308 Strategica 2016
ELEMENTS OF AN EFFECTIVE SALE PROCESS: THE SUCCESSFUL
SALESMAN BETWEEN MYTH AND REALITY
Costin DĂMĂȘARU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
costin.damasaru@facultateademanagement.ro
Mihai MIHALACHE
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
mihalache.mihai20@gmail.com
Andra CRĂCIUN
University of Bucharest
4-12 Regina Elisabeta Blvd., Bucharest, 030018, Romania
andra.craciun.psi@gmail.com
Abstract. Focusing on the impact of several techniques and methods upon the efficiency
of a sales representative, the present paper proposes to analyze the way in which
applying such techniques and methods might lead the sales representative to success. In
order to clarify the importance of such an impact, the paper presents the applying of a
questionnaire with specific questions meant to conclude the role of such techniques in
reaching success. The questionnaire was structured within the following five research
dimensions with the purpose of obtaining a series of key correlations between the terms
of these dimensions: sales efficiency, efficient techniques of closing the sales act,
techniques of overcoming difficult moments, the pre-sales process and post-sales process.
The results of the applied questionnaire were interpreted and as a result of analyzing
them, we came to the conclusion that specific techniques and methods are necessary for a
salesman who wants to be more efficient, therefore to a salesman who wants to be
successful.
Keywords: efficiency; techniques; success; process; sales; sales representative.
Introduction
Within the business environment, sales and the sales representative stand out as the
main engines of a company’s financial functioning. The more a company’s sales
representative succeeds in maintaining a positive relationship with the existing clients
and succeeds in attracting new ones, the more sales will increase and the company will
prosper. The present paper explores several possible elements that might influence a
salesman’s performance.
From this point of view, aspect such as the relationship between the client and the
salesman, the way they communicate, details of the meeting (such as environment,
means of establishing and maintaining contact) can be considered one of the elements
that should be taken into consideration when analyzing the salesman’s efficiency and
Marketing and Consumer Behavior 309
success. The sales process implies that the salesman makes the effort to obtain a face-
to-face meeting with the client, whether at the client’s office or in an environment, that
can be controlled, becoming suitable for completing the sales endeavor (Dan, 2014).
Mandino (2008) states that there are four ways in which one can be in contact with
other; hence, people are evaluated and labeled according to what they do, how they
look, what they say and how they say it. We may consider that these are aspects that a
salesman should always keep in mind as being determinants of the quality of the
relationship that is established with the client. The client – salesman relationship also
includes the emotional state that is triggered between the two; from this point of view,
Curcă (2009a) emphasizes that positivity and enthusiasm both might have beneficial
effects upon both the salesman and the act of sale itself. The author also brings to
attention that the counter-effect might also be present, in which the enthusiasm turns
to negative connotations making the salesman skip from sight the needs of the client,
lose focus from the sale and leaving more and more room for the client to negotiate,
even in disadvantageous ways.
Over the years several authors (Hopkins, 2014; Pink, 2013; Ziglar, 2002) emphasized
different techniques and methods that should be used in order to seize a deal. Having
knowledge of the product that is being sold and its qualities is the main factor of
succeeding to sale. The successful salesman should always be capable of offering any
type of information regarding the product or should have the possibility of doing so;
otherwise, the difficult situation might arise on the behalf of the client. Such situation
usually has serious implications, as the client can observe the salesman’s insecurities,
further becoming uncertain that he or she should proceed in buying the product.
Several myths popularized within the sales domain have been proven to promote
ineffective ideas. For instance, a harmful myth is considered aggressiveness, the
salesman’s desire of succeeding by any means, losing sight of the fact that a sales
process should be based on the client’s needs. Another less beneficial myth is that a
successful salesman talks a lot. This method consists in the salesman’s attempt to
convince without allowing the client to express their objections, in other words,
without listening. Pink (2013) considered that sales are a domain which does not
request intelligence, that such activities are destined to “dodgers”. We consider that
such lines of thought could themselves be harmful to an activity that is basically
essential from an economic point of view, and limit the possibility of coming to an in-
depth understanding of the sales process.
Tom Hopkins (2014a, p.225) considered that the sales process is “the act which
assures valuing production, respectively making up for fabrication costs and preparing
the product in order to be sold, and including the element of profit”.
Several ideas have been proposed by literature in order to explain sales success. For
instance, Cioroianu (2015) considered that success in such activity is related to the
salesman’s ability to sell anything to anybody, no matter the product. In addition,
Carton (2008) suggested that the way of building one’s portfolio might represent an
advantage – techniques such visits and phone calls being insufficient for obtaining such
portfolio. Zbuchea et al. (2015, pp.228-234) argue that controlling the behavior of sales
representatives is more effective than result control and they give a series of
guidelines to be considered for the successful approach of customers.
310 Strategica 2016
Hopkins (2014a) brings to attention the consultation interview, destined to diagnose
and investigate potential clients’ expectations. The salesman, therefore, decides
whether further sale possibilities should be discussed if one detects a lack of interest of
the client. Also, a successful salesman should be focused on obtaining face to face
meetings with the client (Dan, 2014) and on using the ability to listen (Baia, 2011),
using one’s intuition in order to identify the client’s need so that a suitable offer can be
made. From this point of view, Hopkins (2014a) emphasizes the need of showing
authentic interest towards the client, addressing questions regarding one’s need,
guiding one to the best solution; according to the author, in this context a positive
reaction of the client should be reinforced, in order to establish positive feelings within
the process.
Duncan (2014) also supports this point of view by stating that a trustful relationship is
only formed if the client sense that the salesman is an honest, upright person, who
keeps one’s promise and disposes of the means of doing so. According to Tracy (2014),
it is important to reach a point of understanding the way people think, the reasons
behind their buying behavior and the importance of identifying the most creative
techniques that can be used in order to convince them to buy, as such elements
support a significant increase of incomes in a relatively short period of time.
Perhaps one of the most well-appreciated techniques that can apply by a successful
salesman is persuasion, according to Rujoiu (2011), who points out that this element is
found in many domains of activity, being considered of high necessity, along with
negotiation. The successful salesman manages to transmit a clear message to be well
interpreted by the client, leading to conclude the sale; results are to appear even faster
with such a message is personalized according to the needs and requests of the client
(Schmidt & Adamson, 2015, p.4). Ziglar (2004) points out that in order to become a
successful salesman one need to engage in a process of ongoing learning, even if
success has been reached.
As for factors that might interfere with a sales process’ success, Hopkins (2014a)
emphasized the salesman’s reaction to a client’s stimuli; what is said or done during
the sales process can be defining for concluding the sale and can make the difference
between a mediocre and a successful salesman. Hopkins (2014b) also created a five-
step model that facilitates sales even in periods of crisis – when there are no more
buyers. The model implies the exploitation of the clients’ list in order to generate new
and potential clients; applying innovative techniques of ending the sale, involving low
costs; reducing resistance through psychological techniques of diminishing fear;
keeping and rewarding clients to that they remain loyal; attracting competition’s
clients through specific strategies.
Another important contribution brought by Hopkins (2014a) in the field of sales is his
analysis of the theory of stimuli, pause, and reaction. We may consider that this
approach could be the criteria that make the difference between success and failure in
the process of sales. According to the author, a behavioral response can be most easily
described through the stimuli – reaction relationship. The human mind is constructed,
as opposed to an animal’s in such manner that it allows us the analyze stimuli once it is
received in order to make a pause (not respond immediately) and try to find the best,
most suitable type of reaction.
Marketing and Consumer Behavior 311
The reaction in such pauses can be adjusted, in order to reach effectiveness, through
practice, training, and repetition. The reaction is considered by Hopkins (2014a) to be
decisive during the act of sale, referring the salesman’s reaction, what one intends and
is about to say or do as a response to the client’s stimuli (what is triggered from their
behalf in the form of verbal or nonverbal acts). Managing such a dynamic is according
to the mentioned author, the element that might make the difference between a
successful and mediocre salesman. „The most difficult is to teach the young salesmen
that, if they are not sure about what they are about to say and do before facing the
client, then they can consider the deal to be already lost” (Hopkins, 2014a, p.89).
The mentioned theoretical aspects regarding the process of sales are meant to offer a
general guideline for the proposed study. In order words, we have intended to describe
several aspects which are considered by the professional literature to be of importance
from the point of view of the successful salesman. Further, these elements contribute
to the construction of an instrument destined to be completed by sales professionals in
order to validate the mentioned lines of thought and to verify if they are indeed worthy
of further explorations from a scientific point of view.
Study regarding success in sales
Objective and hypotheses
The main objective of the present paper is to identify the best abilities and methods
that a successful salesman should apply in order to conclude the sale process and
increase effectiveness.
Our main presumption is that a successful salesman should own a series of abilities
which should be continuously developed so that he would be capable of offering
complete sales services to the clients, understanding their needs and offering services
which satisfy such needs, therefore proving to be a successful salesman. The following
hypotheses have been proposed:
- Successfully applying sale techniques is the method through which the salesman
becomes more effective;
- Both pre-sale and post-sale processes can significantly increase the salesman’s
effectiveness;
- It is presumed that using methods and techniques specific to concluding the sale
represents the starting point of becoming a successful salesman.
- We assume that a salesman’s crisis can be overcome through techniques of solving
difficult moments.
Instruments
The applied instrument consistent in a closed-ended questionnaire addressed to
managers and employees of some of the most successful Romanian sales companies.
Items were constructed based on criteria extracted from professional literature
(Hopkins, 2014; Ziglar, 2002; Ziglar, 2012; Pink, 2013). The items were designed
according to five main domains, respectively: salesman’s effectiveness, efficient
techniques of closing the sales process; techniques of overcoming difficult moments;
312 Strategica 2016
pre-sale process and post-sale process. The instrument was applied online, via e-mail,
during April and May 10, 2016.
The questionnaire was built so that it included three dimensions, which will be further
described. The first dimension refers to the salesman’s efficiency and it included items
such as: “How often do you succeed in closing a sale?”, “How often do you succeed in
reaching you target?”, “How often do you deliver services and products which are
needed by the patient?”; the section has the purpose of identifying the salesman’s
efficiency depending on the degree of concluding the sale, the frequency of reaching
the imposed target and the salesman’s ability to satisfy a real need.
The second dimension refers to techniques and methods considered to be effective in
closing the act of sale, which the salesman should own in order to succeed. This
dimension includes items such as: “On a 1 to 5 scale (1 meaning “unimportant” and 5
“important”), please rate how important is the moment of the salesman’s reaction”;
“How important do you consider intuition to be, in unexpected situations?”, “How
important do you consider experience to be, in an unexpected situation?”, “Out of your
own experience, do you consider there is a need to permanently be updated with new
tendencies and techniques of the domain?” – the section having the purpose of
identifying the importance of specific techniques of concluding a sale and the potential
effect they might have upon efficiency, from the point of view of successful salesmen.
The third dimension refers to techniques applied by successful salesmen in order to
overcome difficult moments of one’s career. Examples of items: “In a moment of crisis,
is adaptability a way of overcoming difficulties?”, “On a 1 to 5 scale, how would you
rate returning to basic techniques as a way of overcoming difficulty?”. The section has
the purpose of identifying the necessity, importance and effectiveness of several
techniques (practicing, returning to basics, innovation, adaptability, and ability
development) in relation to using them in crisis situations which interfere with one’s
career. The questionnaire included a total of 13 items and obtained data was analyzed
using SPSS.
Participants
The questionnaire was sent to a total number of 120 people, out of with 108
responded. The sample included 79.6% male participants and 20.4% female
participants, aged between 25 and 55 years old. As for their occupations, 58.3% were
salesmen, 29.6% were sales team coordinators and 12% were sales managers. Based
on the questionnaire responses we concluded that the participants are effective
salesmen who manage to often or very often close a sale, to reach the target imposed
by the company, or to be effective while promoting a product or service to their client.
Results
The first hypothesis, stating that successfully applying sales techniques is the way in
which the salesman becomes more affective, is supported by our data. Hence the
importance of the salesman’s reaction is positively correlated both with closing the
sale (r = 0.60, p<0.000, N = 108), and also with the frequency of reaching the proposed
sales target (r=0.56, p<0.000. N-108). Another positive correlation was obtained
Marketing and Consumer Behavior 313
between the technique and the frequency with which the salesman delivers products
and services which correspond to the client’s needs (r=0.49, p<0.000, N=108).
An important element of this research dimension is represented by the need of
applying the following techniques: persuasion, using intuition, understanding the
client’s needs, adjusting reaction, innovation, being adaptable. Such techniques
obtained significant correlations with all reporting elements: frequency of closing a
sale (r = 0.86, p< 0.000), reaching imposed target (r = 0.81, p< 0.000) and satisfying
client’s needs (r = 0.72, p < 0.000).
The second hypothesis referred to the pre-sale and post-sale processes and their
impact on the salesman’s efficiency and was supported by the obtained data.
Specifically, the importance of the consulting interview correlated significantly to all
criteria (success of sale: r =0.83, p< 0.000, N=108; frequency of reaching target: r =
0.90, p< 0.000, N=108, and satisfying the client’s needs (r = 0.73, p<0.000, N=108).
The salesman’s ability to obtain information regarding the client obtained significant
correlations to all three criteria: closing the sale (r = 0.52, p<0.000, N=108), frequency
of reaching target (r= 0.43, p<0.000, N = 108), satisfying the client’s need (r = 0.65,
p<0.000, N=108).
The importance of post-sale process and its impact upon the salesman’s efficiency
significantly correlated to all three criteria: closing the sale (r = 0.88, p< 0.000, N=108),
frequency of reaching the target (r=0.67, p<0.000), satisfying the client’s needs (r =
0.63, p<0.000, N=108). The frequency of maintaining the relationship with the client
outside the sale act recorded a significant correlation with all criteria (p<0.000,
N=108): closing the sale (r=0.89), the frequency of reaching the target (r=0.82),
satisfying the client’s needs (r=0.76).
Another hypothesis states that techniques and methods specific to closing the sale are
factors for becoming a successful salesman, and was confirmed regarding the following
elements, persuasion, using intuition, knowing the client’s needs, adjusting one’s
reaction, being adaptable, innovation and forecasting (p<0.000, N=108) with the
following coefficients: first criteria (r=0.86), second criteria (r=0.81), third criteria
(r=0.72).
Our last hypothesis stated that a crisis moment can be easier to overcome by applying
specific techniques and was also supported by our data (p<0.000, N=108) with the
following Spearman correlation scores: frequency of closing a sale (r=0.55), satisfying
the client’s needs (r=0.52). Being adaptable and using innovation to overcome crisis
reported the following correlations (p<0.000, N=108): frequency of closing a sale
(r=0.80), the frequency of reaching the target (r=0.68), satisfying the client’s needs
(r=0.63). Returning to basic techniques, as a manner of overcoming the crisis, obtained
the following correlation scores (p<0.000, N=108): closing sale (r=0.78), the frequency
of reaching the target (r=0.84) and satisfying a client’s need (r=0.71).
314 Strategica 2016
Conclusions
The present paper confirms that the successful salesman can be seen as an objective
which can be reached by correctly managing pre and post-sale processes and by
applying the most effective techniques of closing the sale and by overcoming crisis
moments inherent to a salesman’s activity. Our initiative was based on the observation
that both on the common sense level and in some literature resources, as mentioned
previously, the successful salesman is sometimes viewed as a shallow character; on the
other hand we succeeded in proving that this is a profession requiring specific skills
and strategies in order to obtain success, more than being characterized by
advantageous personality traits. Responses obtained through responses of 108
participants validated our hypotheses and offered a general view upon the successful
salesman.
As mentioned before, our respondents were represented by sales professionals who
are characterized by high results in their domain, succeeding to complete most of their
sales processes, reaching their targets and answering to the client’s needs. This aspect
along with the number of participants allows us to consider our results as
representative and useful for further scientific initiatives regarding the sales
problematic.
In order to be effective and successful, the salesman should apply a series of
techniques and methods which are considered to be essential by our respondents.
Such elements have the purpose of making the sale act more effective and supporting
the salesman in reaching one’s goals more easily. Maybe one of the most suggestive
techniques of overcoming crisis is represented by returning to basic techniques, the
ones who were proven by experience to assure the success of the salesman. This result
can be considered as extremely useful especially for the younger representatives of the
sales professionals. We may consider the result to be rather counterintuitive. Crisis
situations are some of the most resource-requiring and challenging moment – no
matter the professional activity which is conducted. We may, therefore, expect them to
require original and highly intuitive solutions, while in sales, as demonstrated by the
present demarche, classic methods come to offer the safety of overcoming the crisis.
Another valuable technique is represented by adjusting the salesman’s reaction to
different stimuli generated by the client – depending on the way in which the salesman
succeeds in interpreting those stimuli in order to properly adjust. This element can be
highly decisive as far as the sale results are concerned.
Practicing and training may be considered as keys of success – the more specific
techniques are practiced the more the sales process will become simpler, implicitly
facilitating the closure of a sale. In addition, the maximum efficiency point is proven to
be very important in the pre-sale process, in which the salesman is preoccupied with
information regarding the client, the environment where the sale process is being
conducted and the client’s specific needs. In addition, the post-sale process is
dominated by the communication between the salesman and the client, with major
impact upon the client’s fidelity. Good communication from this point of view is based
on the clients’ portfolio – which every salesman should develop as much as possible in
order to be successful.
Marketing and Consumer Behavior 315
The pre-sale process is the starting point of the sale, the moment in which the
salesman accommodates to their client and their needs, keeping in mind the main
objective of reaching those needs and satisfying them as effectively as possible. Once
this process is started, the techniques and methods specific to the sale process allow
the salesman to complete the deal.
The consultation interview stands as one of the most effective techniques of the pre-
sale process; it is the context which allows the salesman to become familiar with the
client’s needs and proposing, accordingly, potential products and services, capable of
satisfying such needs. In order to reach one’s objectives, a salesman should treat
accordingly the consultation interview, which allows gaining essential information
regarding the client and their needs. Such interview can represent the basis of a long-
term relationship between the client and the sales agent.
Persuasion, intuition, forecasting, having knowledge regarding the client’s needs,
adjusting one’s reaction, being adaptable, using innovation can be considered as
techniques which cannot lack from the repertory of a successful sales agent, making
him or her more effective during the process of closing a sale. We consider that such
techniques might facilitate the salesman’s path to success.
The salesman’s availability towards the client and his needs may represent an
important point of connection between the two actors, facilitating the entire sales
process. Another ability we can consider being necessary for the success of a salesman
is the ability to listen to the client and using intuition in order to identify the actual
need one is addressing as a client, in order to be able to properly respond to the
respective need.
Based on the professional literature analyses we have conducted and on the present
study, we recommend that a successful salesman should be involved in a continuous
process of self-development and learning, to be always connected to the field’s new
tendencies and adapt to them, assimilate them so that they can be properly applied
during the actual sales process.
Our premise consisted in the idea that the successful salesman is not a myth but a
person who is able to apply a concrete series of techniques and methods which are
seen by our respondents as mandatory in order to increase one’s effectiveness. Our
research supports further initiatives of exploring on in-depth levels the proposed
techniques and methods (returning to basics during the crisis, adjusting one’s
reactions depending on the client’s behavior, engaging in the consultation interview, to
name just a few). In addition, we suggest that clients (whether existing or potential)
should also be involved in future research regarding a salesman’s effectiveness in
order to obtain a complete understanding on the matter.
316 Strategica 2016
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Marketing and Consumer Behavior 317
CHASING EXPERIENCE.
HOW AUGMENTED REALITY RESHAPED THE CONSUMER
BEHAVIOUR AND BRAND INTERACTION
Rareș MOCANU
National University of Political Studies and Public Administration
30A Expozitiei Blv., Sector 1, 012104, Bucharest, Romania
rares.mocanu@facultateademanagement.ro
Abstract. Means of fast entertainment and the boom of any time – anywhere media and
technology are a reality which became more and more prevalent. Going online on our
mobile devices to communicate with friends, classmates, and acquaintances has become
the activity of choice and sometimes the “must to” activity for most of us especially teens
and young twenty-somethings. For the younger generation, the multitasking way of
doing things is a natural state of mind and the electronic reality is an expected part of
everyday life. Therefore this state of constant intentional self-distraction could well be of
profound detriment to individual and cultural well-being. This study investigates the
factors that influenced the user experience involved with the augmented reality video
game Pokémon Go, and sought to determine if the unique combination between mobility,
Pokémon Go brand nostalgia, and real life game immersion offers different levels of
experience, changing or reshaping customer behavior within the players and reconfigure
brand interaction as well as video game experience.
Keywords: user experience; usability; mobile augmented reality; Pokémon Go; consumer
behavior; brand value; experience marketing; game immersion; Smartphone-app
Introduction
As marketers constantly try to encounter customers demand more experiential
attraction instead of traditional marketing incentives, Augmented Reality (AR) is
increasingly more appealing as a marketing means over the last years. The
technological development of mobile devices has brought many advantages to the
development of Mobile Augmented Reality (MAR) applications and since the
customers experienced rewarding functional features, benefits and product quality
(Schmitt, 1999), marketers have pursued in finding new forms of marketing
experience to go beyond the standard accepted features.
Smartphones and tablets allow users to carry a range of applications with internet
access, location and movement sensors, and sufficient computational resource for
playing multimedia content. Relatively newly introduced as entertainment factor,
mobile augmented reality (MAR) technology interconnects with the real world by
artificial information and images enhancing user’s live activities using mobile devices
at various locations, such as at school, at work, at home, on the way meeting friends or
during a walk in the park. The MAR uses technological resources aiming to expand the
user’s senses in relation to an ongoing action or a given task, generally using visual
content. An example of a task that can be enhanced by MAR is to discover, explore and
experience nearby or randomly sights using mobile devices that extends the user’s
318 Strategica 2016
sense of direction highlighting Points of Interest (POI) or locations with virtual
markers or virtual content over the real sight, helping the user to accomplish different
tasks.
The release of Pokémon Go and the uproar that has followed it prove that mobile
augmented reality (MAR) is going to have a big impact on digital marketing in the
coming years.
This paper aims to present the momentum factor that an “interesting” augmented
reality video game format which combines mobile technology with real-life settings
determines new types of connections and human interactions. The paper also explores
the influence that this type of game has on the way people feel, communicate and shop.
Augmented Reality Games: new issue in marketing
Because our mobile phones or smartphones are considered by a large majority more
important that ID papers or house keys, these devices may represent a lucrative
element for mobile virtual marketing campaigns. According to Nielsen (2015), more
than half of all Europe mobile subscribers own a smartphone. In Romania, for example,
more than 46% of mobile phone users are smartphone users. According to Juniper-
Research, by 2017 more than “3.5 billion AR apps will be downloaded on smartphones
or tablet” (Bodhani, 2013).
Because of to the growing usage of smartphones and mobile applications, AR
marketing because of high interest for marketers. AR became part of the marketing
communication strategies. The dispersion of age of smartphone owners was for the
year 2012 as followed: 6.4% of smartphone owners were under 18 years old, 17,4%
were 18-24 years old, 27.2 were 25-34 years old, 21.5% were 35-44 years old and
finally 26.5% of smartphone owners were over 44 years old (GO-Gulf.com, 2012).
Consequently, the majority of smartphone user was between 25 and 34 years old, and
the communication strategies should be adapted to this age group.
The development of new technology brings new forms of data. As an example of new
technology, since 2006, the platform of smartphones has been adopted by consumers,
manufacturers, and developers, becoming a normal part of everyday use and an
integral part of data collection (Singer, 2012) Further, social networks such as
Facebook, Twitter, and LinkedIn – track user interactions, interests, and the creation of
content to the degree where an individual’s online identity mirrors their real-world
identity to a striking degree (Sangani, 2013). Large searchable databases have enabled
researchers to easily query to stored results and pull from datasets that have
unprecedented size and growth; Twitter stores upwards of 340 million tweets every
day (Sangani, 2013). While the size of these datasets is immense, the syntactic nature
of the stored data is difficult to analyze using traditional methodologies, as they were
designed for much smaller sample sizes and number of variables.
The immense power of AR on a mobile device is related with the growing of the mobile
augmented reality industries to $150 billion in revenue by 2020 (Digi-Capital, 2015).
The potential was recently demonstrated by the growth of Pokémon Go game,
associated with a well-known Japanese cartoon character, especially for the
Marketing and Consumer Behavior 319
Millennials. Along with the convergence of AR, and GPS / POI (point of interest) form of
the game was resonating with many users. Approximately 30 million people in only a
few weeks from the Pokémon Go's initial launch were actively involved.
The potential for mobile marketing to the Pokémon Go audience is enormous and it
proves to be more than a fad having the potential to become the next segment of
influencer marketing that retail companies look to integrate into to their marketing
plans. In the same time, the small businesses segment has to closely latch on to the lure
functionality of mobile augmented reality games like Pokémon Go and do to the
mobility form of the game to be able to provide purchasable items at their locations
(McNeal, 2013).
Considering rewards and incentives systems, we rely on technology to effectively
connect with reward beneficiaries. To be relevant, we need to exceed audiences'
expectations during every phase of the interaction. Technology innovations are key
aspects in this context. It’s also not hard to see a future advertising revenue stream for
companies like Nintendo in which a local business pays a nominal fee to have a rare
Pokémon appear in its store or to create designated trade/battle sites and then sell
them to businesses, therefore creating an interest factor for this kind of places that
could be big draws for players, making them to stay a while and trade or purchase
things (Handley, 2013).
One of the big topics reflected in the past years in marketing has been the SoLoMo
(Social Local Mobile) marketing. The recent Pokémon Go phenomenon illustrates the
potential in this matter, because Pokémon Go managed to interestingly combine social
media with local marketing, permitting interaction between virtual and real worlds. Of
relevance is the impact on small businesses, which registered additional sales due to
increased traffic related to the Pokémon game. Being the first popular AR game of its
kind, Pokémon Go could be the model for completely new ways of interacting with
consumers and creating communities both online and in real life (Bodhani, 2013). This
could be a twitch for brands to start creating their own AR games, to collaborate in
such endeavors, or to offer in-app purchases within other companies' AR games. We
believe that very soon, brand will buy ads within Pokémon Go or similar AR games,
similar with the way they buy ads on Facebook. Other ways to engage with audiences
on the Pokémon Go platform could be considered, such as branded characters for
instance. Pokémon Go makes brands to creatively use the technology in order to
generate new customer experience.
Pokémon Go combines elements of both “smartphone” and “real life” game offering an
exciting and intriguing mix because the rise of Pokémon Go is part of the new era of the
Internet of Things (IoT). The integrated technology influences the way people interact
with their mobile devices, with real life objects, as well as with physical spaces. New
applications of this technology could also emerge allowing new ways to communicate
and interact with customers. ”Pokémon Go is a sign of the growing convergence between
mobile technology and real life interaction, and there are surprising implications here for
the way companies market and sell. The rise of IoT and augmented reality technology is
going to make it possible for people to interact in new ways that blur the boundaries of
“online” and real life, and this is going to require new levels of innovation and creativity
from sales and marketing strategies” (Schwartz, 2016).
320 Strategica 2016
Mobile augmented reality games and customer experience
Experience marketing has caught the interest of many practitioners and academics for
now more than thirty years since Holbrook and Hirschman 1982 first introduced the
idea of an experiential factor in consumer behavior, emphasizing hedonic dimensions
like feeling, fantasia and fun. During the last three decades, detailed definitions of
customer experience have emerged. Gentile et al. defined experience marketing as
followed: “Experience originates from a set of interactions between a customer and a
product, a company, or part of its organization, which provoke a reaction. This
experience is strictly personal and implies the customer’s involvement at different levels
(rational, emotional, sensorial, physical, and spiritual)” (Luigi et al., 2012).
Accordingly, Brakus, Schmitt, and Zarantonello (2009) defined the interaction between
customer and product, company or part of the organization as brand-related stimuli. In
former publications Schmitt (1999) already emphasized the need for experience
marketing to stimulate and emotionally affect the customer during the consumption
experience in order to evoke an internal and behavioral consumer response (Brakus,
Schmitt, Zarantonello, 2009). AR marketing falls into the category of sensory
experience since it follows the “objective of creating experiences, through sight, sound,
touch“ (Schmitt, 1999, p.61), accompanied by affective component arousing strong
emotions like joy or the feeling to be entertained. Furthermore, the authors Pine and
Gilmore (1998) emphasized these stimuli as memorable events that encourage the
customer to buy (2004, Trade in ads for experiences)
In this new framework, experience marketing seeks to set affective stimuli in order to
facilitate the product evaluation and encourage a positive buying decision. Moreover,
consumer behavior literature emphasized cognitive stimuli that affect the buying
decision (Engel, Blackwell & Miniard, 1995; Hoyer and McInnis, 2010). Accordingly,
Cacioppo and Petty elaborated in their studies the Elaboration-Likelihood-Model
(ELM) that should define and clarify how customers perceive and process information
given via marketing communication elements. They viewed customers as evaluators of
information as well as affective deciders dealing with persuasive appeals. Depending
on the level of elaboration of information, the customer, on the one hand, will be more
influenced by arguments and content, which is called by Cacioppo and Petty the
“Central Route” of persuasion. On the other hand, recipients who are more influenced
by emotional appeals will follow the “Peripheral Route” (Cacioppo & Petty, 1984).
Nevertheless, it has to be considered that the two routes are not “two mutually
exclusive and exhaustive “types” of message processing” (Cacioppo & Petty, 1984, p.
673). Applied on marketing via AR the persuasion could be created in two possible
ways. First, if the AR ad offers additional information towards the product, the
customer will think about the arguments and generate a cognitive response (Central
Route). Second, if the AR ad aims only to create an experience for the customer, he or
she will not feel motivated to think about arguments deeply (Peripheral Route) and
probably will show a higher tendency to response affectively. Achieving the stimulus
does not lead certainly to an active response for example like direct purchase, but it
can have an influence on later decisions and behavior (Solomon, 2006). Gamification
(the use of gaming concepts in a non-game setting, an increasingly popular concept)
has long been used in online marketing. This approach generates consumer
engagement and retention. Add rewards and incentives associated with a model like
Marketing and Consumer Behavior 321
this can increase engagement exponentially, leading to loyalty and maybe other
surprising outcomes.
The Nobel prize-winning psychologist Daniel Kahneman has introduced in 1996 so
called the Peak/End rule that recently started to be used in experience design. The
peak/end rule explains how happy we feel with an experience and is based on simple
formula – quality of experience is the average between how you felt at the end of the
experience with how you felt at the most emotionally intense moment (‘peak
emotion’). So no matter how many touch points you have in your customer journey –
the only two points that matter from this understanding of customer experience is the
point at the end and the point when emotion is at its most intense and that’s because
these are the moments (the peak and end moments) that get encoded into your
memory – we tend to forget the rest. Moreover, because it is our ‘remembering self’,
the self-built on our memories that inform our judgments and behavior (such as
buying more or again, or recommending), memories are what matter. The interesting
trend that Kahneman’s rule is pointing in relation to consumer experience (CX) is
focusing on the customer journey map – if it has an intimidating number of
touchpoints to manage, focus first and foremost on what really matters to the
customer experience – the last touchpoint and the most emotionally intense
touchpoint and do not focus that much on customer experience itself – start focusing
on memories of customer experience. CX is about memory making and the customers
are always memory makers.
Liraz Margalit (2016) investigated the way Pokémon Go stimulates engagement,
retention, and virality: “From an evolutionary standpoint, our brains operate much
better in a natural environment that’s rooted deeply in our mind, compared to a setting
based in virtual reality. Our behavior is governed by two parallel processes – the
conscious process that revolves around our immediate tasks (in this case,
winning Pokémon Go) and the unconscious process responsible for ensuring that there
are no threats or sudden changes in our environment. When playing virtual reality
games, the unconscious computation in our brains is forced to work much
harder, because it’s not familiar with this strange virtual reality environment”.
Playing augmented reality games as Pokémon Go involves the actual environment, to
which people are very familiar and comfortable. People prefer such things; the
information is easier to process. This sense of familiarity makes people enjoy more the
game. Pokémon Go presents some other advantages too. The game itself is simple to
understand and easy to play both for children and adults. The game also has a
gratification system embedded, which makes people crave for continuous engagement.
The players might find the reward anywhere, at any time. An additional pleasure is
generated by evoked nostalgia: it activates memories from childhood and social games
outside like tag or hide-and-seek. Pokémon Go stimulates also the need for fantasy.
”Such games boost adrenaline levels and awaken strong feelings of power—as well as
frustration, gratification, and enjoyment” (Margalit, 2016).
Mobile augmented reality games and brand experience
AR has empowered the consumer. Efficient and comfortable buying decisions are
easier to take. AR offers equal opportunities both for brands and for customers,
322 Strategica 2016
facilitating the buying processes. For instance, IKEA was one of the first brands to
embrace AR with a platform that allows their customers to superimpose furniture into
their very own living space. Why does this matter? The application allows for a much
quicker transaction as no in-store visit is required and the chances of having to return
the product are reduced significantly.
From a loyalty standpoint, rewards programs have become far more stimulating as
gamification has increased personalization and ultimately increases the enjoyment
level. Walgreens’ demonstrated this in their Aisle 411 application. It guides customers
through their stores helping them discover more products, uncover in-store
promotions and build loyalty points. Integration is another benefit that customer sees;
sharing information and experiences across different social channels throughout the
path to purchase provide more confidence in the products and brands.
Aside from infatuating the customer, AR can pay serious dividends to an organization.
Creating a virtual shopping platform has the ability to reduce overhead operating
costs, minimize your sales force and develop enormous word of mouth for a brand. AR
allows a company to plant a 24-hour interactive shopping mall directly into the palms
of consumers, capitalizing on our obsession with mobile devices and 'in the moment'
impulses. The sophistication of customer engagement has the ability to foster a real
relationship with the user, which can increase sentiment and loyalty to the brand.
Sephora launched a Virtual Artist Tool earlier this year that allows customers to try on
their line of makeups and lipsticks through their front facing camera. Within the first
eight weeks of its launch, the app saw 1.6 million downloads. Modiface, the tech
company that developed the app, is confident the intuitive purchase process has the
ability to increase online and mobile conversions by 80%.
Brands that are more readily available are more likely to fulfill consumer need states.
When it comes to QSRs, brands can increase their physical availability by increasing
the number and accessibility of their locations. Providing more reasons to visit their
stores or locations creates new consumer entry points. In this case, Pokémon Go drives
traffic to these locations by making them desirable destinations for anyone playing.
Given that these consumers will have likely been walking around for hours glued to
their phones while playing, the Golden Arch labeled “PokéStop” are likely to trigger
and satisfy hunger and thirst need states. It will be interesting to see how the potential
washroom lineups influences paying, yet non-playing consumers.
Conclusion
The most valuable aspect of Augmented Reality to a brand is the capacity to track and
analyze the data that the customers are providing them in real time. Gathering
feedback through interactions with the user, allows brands to create a highly
personalized profile of the customer for targeted marketing efforts and customer
relationship continues to strengthen long after the initial purchase.
AR has had the biggest influence on the retail industry. Its presence has forced retailers
to consider strategies to compete with the early adopters. In the future, it is not hard to
envision a company that strictly operates through AR applications without any online
Marketing and Consumer Behavior 323
or brick-and-mortar channels. Limits of the technology, such as battery life,
connectivity and privacy issues, are preventing the complete potential of AR’s impact
and will surely be the focus of future developments. However, as the technology
becomes more streamlined, its capacity will continue to grow into different sectors and
exert its influence on consumer's buying behaviors, shaping in the same time the way
marketing strategies are approached.
References
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Brakus, J., Schmitt, B., & Zarantonello, L. (2009). Brand Experience: What Is It? How Is
It Measured? Does It Affect Loyalty? Journal of Marketing, 73(3), 2-68.
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Psychology, 42(1), 116-131.
Cacioppo, J., & Petty, R. (1984). The Elaboration Likelihood Model of Persuasion.
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324 Strategica 2016
GLOBAL VALUE CHAINS FROM A MULTIDIMENSIONAL
PERSPECTIVE. A PRELIMINARY INSIGHT
Vlad-Andrei ALEXANDRU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
alexandruvlad_05@ymail.com
Abstract. The present paper addresses a multidimensional perspective on global value
chains (GVC), starting with the smallest actor (i.e., the firm), continuing with the
medium-sized actor (i.e., the network) and finishing with the largest actor (i.e., the
sectoral global value chain). All these actors are integrative parts of a systemic
mechanism which majorly influences the achievement of competitive advantages at
different levels. In order to discuss the primacies of the aforementioned elements, the
organizational agility is brought to the fore along with its different facets, namely
network agility and GVC agility. By corroborating the main lines of research in this
respect, the paper proposes a new outlook on the extant studies, advancing a future
research proposal in the field of interest. Against this backdrop, the current work stands
for a preliminary insight into the dynamics of GVCs, shedding light on potential
theoretical and empirical gaps.
Keywords: global value chain; agility; network; competitive advantage.
Introduction
The international vertical fragmentation of many products and services stands for a
topical issue covering the dynamics of global value chains (GVCs). According to DFAIT
(2011, p.86), “A global value chain describes the full range of activities undertaken to
bring a product or service from its conception to its end use and how these activities
are distributed over geographic space and across international borders.”
Today, a paradigm shift has occurred as the processes of goods production traverse
through a series of phases and locations, the final output being derived from an
interconnected worldwide system. Against this backdrop, GVCs advent and evolution
are convergent with the liberalization of international trade, of foreign direct
investments projects, of people and technology capitalization, of progressively
interconnected organizational players which are clearly positioned on the supply chain
flow (Antràs & Chor, 2013; Baldwin & Venables, 2013; Koopman, Wang & Wei, 2014).
The rapid rhythm of the technological progress, the proliferation of information
devises and services and the technological innovations in transportation infrastructure
have dramatically enabled the coordination of geographically spread production
facilities and the effective management of intricate GVCs.
With a view to depict GVCs and the international production flows, Baldwin and
Venables (2013) approach two constructs: “spiders”, a concept describing production
processes where various parts and components are assembled in no particular order
Marketing and Consumer Behavior 325
and “snakes”, a concept describing processes whose unfolding follows a step by step
flow from upstream to downstream stages with value being added along the way.
Similarly, Bernard and Fort (2013) address the international fragmentation of
production through the lens of “factoryless goods producers”, components of the
wholesale sector who perform pre-production activities and preserve their control
over the sequence of manufactured goods.
In this vein, giving way to strong networks, GVCs exert a special impact on the world
economy, supporting and potentiating the emergence and development of competitive
edges at the international, national and organizational levels (OECD, 2013; Orefice &
Rocha, 2014; Vătămănescu et al., 2016). Countries and firms are, thus, becoming more
economically interdependent, each part of the whole being decisive for the system’s
overall performance (Foster-McGregor & Stehrer, 2013; Koopman, Wang & Wei, 2014;
Păduraru et al., 2016). This is why a thorough analysis of GVCs should integrate the
combination of added values derived from various sources and the investigation of
multidimensional frameworks consisting of productivity, trade flows, market
variations, policy influences, external competitiveness (Dean, Fung & Wang, 2011;
Amador & Cabral, 2014).
From firms towards networks
The re-evaluation of the interconnected actors and industries as parts of a worldwide
mechanism becomes a functional and adaptive imperative, related to the “international
networks of individual and autonomous suppliers that specialize in specific phases of
the production process and locate in different countries. The spatial unbundling of
production stages previously clustered in factories and offices (the second unbundling)
benefited from the sharp fall of communication and coordination costs and radically
changed the nature of international trade and investment.” (Amador & Cabral, 2014,
p.4).
At this level, a paramount issue related to the GVCs dynamics and phenomena refers to
the models of governance. The term ‘governance’ was coined by Gereffi (1994, p.97)
and was defined as “authority and power relationship that determine how financial,
material, and human resources are allocated and follow within a chain”. Sun and Zhang
(2009, p.32) mention in this respect that „a set of strategic parameters can be
highlighted as characterizing governance types: ‘what’ or ‘how’ a product/service
should be produced as well as ‘when’, ‘how much’ and even ‘at the price’”. The authors
also point the theoretical developments on GVCs governance and give credit to Gereffi,
Humphrey, and Sturgeon, (2005) for their analysis of transactional relationships
between lead firms and subordinate firms and for advancing five main models of
governance: market, modular, relational, captive and hierarchy.
The GVCs rely on very complex networks which include actors with different
properties and functions: manufacturing, logistics, transportation, customs agents,
public authorities, etc. The technological infrastructure and processes directly
influence the production phases and the interlinked stages, a fact which engenders a
novel insight on organizational agility.
326 Strategica 2016
Placing networks in the frame of reference, organizational agility stands for an
imperative for business success, supporting the firms’ achievement of competitive
capabilities in dynamic business environments (Fink & Neumann 2007; Bi et al., 2012;
Ghasemi, 2015). Agile organizations act beyond adapting changes and envisage
potential opportunities to attain development and progress. In response to the
changing and unpredictable business environment, there is a high exigency for a global
mindset regarding production, purchasing, selling, distribution opportunities. All the
inherent components should adhere to the consistent improvement and update of
technology, management, communication and transportation infrastructure,
coordination and general harmonization of priorities (Ghasemi, 2015).
At this level, the investigation of the organizational agility specificity among the
“chained” components is indicative of the inter-influences and sectoral effects at the
component and global value chain levels. The variations of organizational agility
among GVCs may emerge as a moderator factor when examining the performance of
GVCs (Swafford , Ghosh & Murthy, 2006) – “A firm’s supply chain agility (FSCA) is
defined as the capability of the firm, both internally and in conjunction with its key
suppliers and customers, to adapt or respond in a speedy manner to marketplace
changes as well as to potential and actual disruptions, contributing to the agility of the
extended supply chain” (Braunscheidel & Suresh, 2009, p.119).
Prior empirical developments
GVCs have set themselves up as a paramount topic within the boundaries of current
research, a considerable body of theoretical and empirical studies discussing their
compelling and relevant nature from the international trade standpoint. A recurrent
challenge in most of the extant studies was the identification of the main drivers and
measures for pertinent assessments of GVCs dynamics. With a view to examine and
map GVCs particularities, studies have employed a wide spectrum of methods, starting
with case studies and finishing with macroeconomic analyses (Lall, Albaladejo &
Zhang, 2004; Amador & Cabral, 2009; Sturgeon & Memedovic, 2010; Antràs, Chor, Fally
& Hillberry, 2012; Corcos et al., 2013; Tukker & Dietzenbacher, 2013). At the sectoral
level, three primary methodological perspectives have been employed, as Amador and
Cabral (2014, p.3) summarized: “international trade statistics on parts and
components; customs statistics on processing trade and international trade data
combined with input-output (I-O) tables. In spite of the intense research over the last
decades, the mapping and measurement of GVCs is still incomplete and several
research strands may bring further valuable results, in particular, those basing on
recently available global I-O matrices. In addition, empirical studies on GVCs using
firm-level data are still scarce, but expanding rapidly”.
A timeline of the main articles in each methodological approach and major measures of
GVCs focused on micro-level data are illustrated in the figures below.
Marketing and Consumer Behavior 327
Figure 1. Measuring GVCs using sector-level data - Timeline of main research
(Amador and Cabral, 2014, p.18)
Figure 2. Summary of main strands of the empirical research on GVCs
(Amador and Cabral, 2014, p.18)
Taking into account the extant research directions, a future approach may encompass
1. The synthesis of the current theoretical developments on GVCs and organizational
agility, respectively of firm’s supply chain agility (FSCA); 2. The investigation of the
GVCs governance models within specialized fields; 3. The theoretical investigation of
328 Strategica 2016
the interrelation between GVCs and organization/chain agility; 4. The advancement of
a new construct “network-driven agility”; 5. The proposal and validation of a
conceptual model integrating GVCs, firm’s supply chain agility and network-driven
agility; 6. The assessment of the GVCs dynamics within a specialized industry.
In order to achieve this objective, along with the sectoral analysis of global I-O matrices
(for example, GTAP - Global Trade Analysis Project; WIOD - World Input-Output
Database; OECD-WTO TiVA (Trade in Value Added) made available by different
organizations and authorities, the methodological approach will include firm-level and
network-level data analyses.
An alternative method of GVCs mapping will rely on microdata, provided by external
researchers and organizations, like the International Study Group on Exports and
Productivity (ISGEP) that used comparable micro-level panel data for 14 countries and
a set of identically specified empirical models to investigate the relationship between
exports and productivity (ISGEP, 2008) or the Competitiveness Research Network
(CompNet) established in 2011 with participants from European central banks, as well
as from a number of international organizations. Additionally, relevant information
may be retrieved from the European statistical authorities which are currently
cementing sample-based comparable firm-level databases.
Empirical studies on GVCs using firm-level data are yet to be properly capitalized and,
thus, a thorough investigation based on qualitative and quantitative survey data would
be a valuable asset in the overall context of the research. Furthermore, integrating the
construct of firm’s supply chain agility (FSCA) within the frame of analysis will result
in a multidimensional and complex approach of the organizational and chain dynamics.
The measurement of organizational agility will rely on the extant agility indices
(http://www.mckinsey.com/business-functions/organization/our-insights/the-keys-
to-organizational-agility, http://agility-mini.com/, http://www.signetconsulting.com
/action_items/assessment.php).
Focusing on a specialized industry and providing evidence from document analysis,
interview and questionnaire-based inquiries conducted with key players in the field
(managers of plants, factories, stockists, distributors, transportation logistics, end-user
organizations) would furnish a pertinent image of the highly complex networks and of
added value dynamics within a systemic mechanism. The analysis will focus both on
corporate actors and small and medium-sized enterprises, offering an integrative
perspective and not just a multinationals-dependent overview. Also, the research will
encompass comparative analyses between different competing value chains /
networks under specific conditions (please see figure 3 for a detailed methodological
design).
Marketing and Consumer Behavior 329
Figure 3. Proposed methodological design
Concluding remark
The advancement of the aforementioned types of analysis will provide pertinent
answers to the extant research gaps related to the study of global value chains. It
would, thus, engender 1. A pertinent conceptual and structural model integrating
GVCs, firm’s supply chain agility and network-driven agility, business performance and
business network performance; 2. A thorough depiction of the GVCs governance
models within a specialized industry.3. An inbuilt construct - network-driven agility; 4.
A thorough overview of a certain industry from the concurring standpoints of GVCs,
firm’s supply chain agility and network-driven agility.
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https://www.surveymonkey.com/r/?sm=Oi3zrdunBjVp5rrDGyxnAA%3D%3D.
http://www.solutionsiq.com/map-organizational-agility/.
https://www.gartner.com/doc/491436/defining-cultivating-measuring-enterprise-
agility.
http://www.mckinsey.com/business-functions/organization/our-insights/the-keys-
to-organizational-agility.
http://www.signetconsulting.com/action_items/assessment.php.
http://agility-mini.com/.
Modelling and Prediction in
Marketing and Management
Modelling and Prediction in Marketing and Management 333
EXPLORING ACADEMICS’ INTENTIONS FOR DOING RESEARCH AND
PUBLISHING
Ioana Alexandra HORODNIC
Alexandru Ioan Cuza University of Iași
20A Carol I Blvd., 700505, Iaşi, Romania
ursachi_ioana_alexandra@yahoo.com
Adriana ZAIȚ
Alexandru Ioan Cuza University of Iași
20A Carol I Blvd., 700505, Iaşi, Romania
azait@uaic.ro
Andreea APETREI
Catholic University Saint Vincent Martyr
34 Marques de Campo, 46003, Valencia, Spain
andreea.apetrei@ucv.es
Patricia BERTEA
Alexandru Ioan Cuza University of Iași
20A Carol I Blvd., 700505, Iaşi, Romania
patricia.bertea@feaa.uaic.ro
Abstract. The aim of this study is to identify the main factors associated with the
intention of academics to get involved in research and subsequently publishing activities.
Using a logistic regression analysis on an extensive sample of academics in economic and
business administration field in Romania, we explore the association between the
intention to conduct research and to publish and a large range set of independent
variables. We analyze two streams of research – one based on the Technology Acceptance
Model and its different applications, the other based on motivational theories about
human behavior. In addition, this study provides predictions for a representative
Romanian academic in economics and business administration field for different values of
independently analyzed variables. For example, the predicted probability for the
representative Romanian academic in economics and business administration to conduct
research and/or to publish for different levels of its perceived self-efficacy, in order to
identify the latter’s impact. The results of the study provide support for managers at
local, national and international bodies in three directions: understanding and acting on
motivations for research and publishing; predicting the evolution of research activities
and academic productivity for the existing personnel; helping universities to hire new
people, based on their research predicted potential.
Keywords: research; publishing; motivational factors; academic productivity; intention
to do research; intention to publish.
334 Strategica 2016
Introduction
Academic research has always been highly appreciated and it becomes even more
important nowadays for universities’ evaluation and competitiveness. All university
classification systems are based on the main visible research results, namely articles
and citations. National academic promotion systems also place a lot of weight on the
number of articles published in journals with high impact factors and on their citations
load. All these evolutions require an intensification of specialists’ efforts to find the
most appropriate solutions for increasing research publications and citations.
However, in order to reach this goal, namely a high productive staff (i.e.
compartmental changes), it is important to identify what factor influence their
willingness to be involved in research and consequently to publish (i.e. attitudinal
changes). Therefore, the aim of this study is to identify the main factors associated
with the intention of academics to get involved in research and publishing activities.
For doing so, we analyze here two streams of research. Firstly, we analyzed the
Technology Acceptance Model, its different applications and its similarities with
research and publishing activities acceptance. Secondly, we analyzed the motivational
theories about human behavior that apply to academics behavior towards researching
and publishing. We also included in our analysis socio-economic variables that were
found as influencing the academic productivity (the desired behavior).
To commence, therefore, a brief review of the Technology Acceptance Model and its
application as well as the motivational theories about human behavior will be
provided. Secondly, for evaluating which factors are associated with academics
intention to be involved in research and/or to publish, a survey conducted at the
national level in 2014 will be outlined, and thirdly, we reported the results. The final
section provides some insights about implications of the findings.
Technology Acceptance Model (TAM), motivation and research productivity
Research activities share large similarities with technology using activities, for which
the Technology Acceptance Model (TAM) theories were developed. The aim of TAM
theories is to predict the acceptability of a certain technology and to identify the
necessary changes in order to make a certain system acceptable for its final users. The
model postulates that the acceptability of a technological system is determined by two
factors: the perceived utility and the perceived ease of use (Davis, 1989; Davis, Bagozzi
&Warshaw, 1989). TAM model was highly used to explain people’s behavior towards
software use (Sharp et al., 2009), online education (Sørebø et al., 2009; Gibson, Harris
& Colaric, 2008), blogging (Hsu & Lin, 2008). Theories and models based on TAM were
continuously refined, revisited, improved or unified (Venkatesh et al., 2003; Wu, Chen
& Lin, 2007).
The idea of using TAM in order to explain academic intention to conduct research and
to publish is motivated by previous studies on the motivation for research in the
academic environment (Zait, 2011; Zait, 2009) and by managerial aims - the quest for
possible solutions in order to increase the number of publications in highly ranked
scholarly journals. Having TAM as a starting point, we analyze here the academics’
perceived research utility and the perceived difficulties for being published in highly
ranked journals.
Modelling and Prediction in Marketing and Management 335
TAM, proposed by Davis (1989) was based on the theory of Reasoned Action
developed by Fishbein and Ajzen in 1975 (Ajzen, 1991; Davis, Bagozzi & Warshaw,
1989). According to this theory, a person’s attitude towards certain behavior is
determined by his or her beliefs about the possible consequences of that behavior and
by the evaluation of those consequences. In addition, the intention to follow a certain
behavior is influenced, besides attitude, by the subjective norms of the individual. The
Theory of Reasoned Action was improved through an extension suggested by Ajzen
(1991), the theory of the planned behavior by adding the perceived control over a
certain behavior. This perceived control comes closer to another motivational theory,
that of Bandura’s self-efficacy theory (Bandura, 1982). Self-efficacy is defined as the
conviction of an individual that he has the ability to organize and realize the necessary
activities in order to accomplish a specific task (Bandura, 1982). When certain
activities are perceived as difficult and dangerous, people have the tendency to avoid
them – and this could be the case for research and publishing activities, as well.
Kominis and Emmanuel (2007) suggested another interesting theory, concerning
managerial motivation explained by the expectancy – valence theory.
A model explaining the research involvement of clinical psychologists was proposed by
Holttum and Goble (2006), including variables such as: research environment and
context, existence of mentoring for research, vocational preferences, attitudes as
expected results of the research, perceived control (self- efficacy and external
constraints), subjective norms and personal factors – professional identity and sex role
identity (Holttum & Goble, 2006). The introduction of mentoring into the model is
interesting, especially because another study suggests that articles publishing could
increase if people would receive seminars for developing their abilities (Ferguson &
Tudiver, 2008).
Wu, Chen and Lin (2007) suggested an interesting model for the acceptance of using a
computer, based on TAM and enriched by a theory of compatibility between tasks and
technology, by subjective norms, network externalities, self-efficacy, and pleasure.
They use variables previously defined by Davis (1989) for perceived utility and ease of
use, as well as those of Fishbein and Ajzen (1975), Venkatesh and Davis (2000), Katz
and Shapiro (1985) for network externalities and Goodhue (1998) for task-technology
fit model (in Wu, Chen & Lin, 2007).
Based on the arguments from the previous section, in order to explain the intention of
academics to get involved in research and publishing activities, we defined and
analyzed the following variables:
- perceived ease of doing research and publishing- the degree to which a professor
(“professor” meaning any academic, in general) believes it is easy for him to get
involved in research and publishing activities, decomposed into the two main
components, doing the research through specific methodologies and publishing the
results in highly ranked journals;
- perceived research and publishing utility – the degree to which a university professor
thinks that by doing research and publishing articles will be better appreciated at the
institutional level, as professional performance;
- methodological auto-efficacy– professors’ perceptions concerning their research
methodology knowledge and abilities;
- enjoyment to do research – intrinsic motivation, the joy of being involved in research
and publication;
336 Strategica 2016
- subjective norms – the degree to which a professor believes that people important for
him expect him to get involved in research activities;
- university motivational support – the degree to which the university recognizes and
appreciates research activities, through moral and financial rewards;
- university technical support – methodological and publishing seminars;
- network externalities – increased research utility, generated by an increase in the
number of other professors involved in research and publication
- external support – informational aid from national institutions for research
All these variables are measured using existent scales, adapted for academic research
activities. Table 1 shows the number of questions used.
Table 1. Number of items for each construct (latent variable), by source
Number
Construct Adapted from
of items
Intention to do research 2
Venkatesh and Davis (2000)
Intention to publish 2
Enjoyment to do research 8 Amabile, Hill, Hennessey, and Tighe (1994)
Wu, Chen, and Lin (2007); Venkatesh and Davis
Subjective norms 2
(2000)
Holden, Barker, Meenaghan, and
Auto-efficacy 9
Rosenberg(2007)
Motivational support from
7
university
Technical support from Al-Nsour (2012); Erbaşı and Arat (2012)
3
university
External support 3
Externalities 3 Katz and Shapiro (1985)
Ease of doing research 4
Venkatesh and Davis (2000); Taylor and Todd
Ease of publishing in highly
3 (1995)
ranked journals
Venkatesh and Davis (2000); Taylor and Todd
Usefulness of research and
8 (1995); Amabile, Hill, Hennessey, and Tighe
publishing
(1994)
Data and methodology
For analyzing who is more likely to have the intention to conduct research and/or to
publish, data is reported from a national survey conducted in 2014. The analyzed
population is represented by the academics in economic and business administration
field affiliated to a public university in Romania. The sample included only the
employees with a public e-mail address on their institutional web page. Therefore, in a
first step we identified and sent our questionnaire to 1422 e-mail addresses from 22
public universities. The only public university for which no e-mail address could be
identified was the University of Pitesti, which was excluded from our sample. In the
second step, after a week from our first message, we sent a reminder to the academics
which did not respond to our first invitation. We obtained in total a number of 533
responses, out of which in the present study we analyzed only those for which the data
to each socioeconomic variable was available, summing 431 responses.
In the analysis, two dummy dependent variables are used with recorded value 1 for
academics who ticked 3 or 4 to the question “Next year I intend to get involved in
Modelling and Prediction in Marketing and Management 337
research in my field of interest”, respectively to the question “Next year I intend to
publish my research results in a highly ranked journal in my field of interest” and with
recorded value 0 otherwise.
To evaluate the academics intention to conduct research and/or to publish, two
categories of independent variables were selected based on the previous studies. On
the one hand, independent variables related to the Technology Acceptance Model and
its different applications and, on the other hand, independent variables related to
motivational theories about human behavior were selected. Therefore, drawing upon
previous studies, we here used: perceived research and publishing utility (Davis, 1989;
Davis, Bagozzi & Warshaw, 1989), auto-efficacy (Wu, Chen & Lin, 2007; Holttum &
Goble, 2006; Bandura, 1982), enjoyment to do research (Horodnic & Zaiț, 2015; Zaiț,
2011; Kominis & Emmanuel, 2007; Wu, Chen & Lin, 2007), subjective norms (Holttum
& Goble, 2006), perceived ease of doing research and publish (Venkatesh & Davis,
2000; Taylor & Todd, 1995), university motivational support (Ferguson & Tudiver,
2008), university technical support (Holttum & Goble, 2006), network externalities
(Wu, Chen & Lin, 2007) and external support (Holttum & Goble, 2006). The other
control indicators considered in the analysis are those related to socio-economic
characteristics influencing academic productivity and include: gender (Horodnic &
Zait, 2015; Baccini et al., 2014; Kessler Spector & Gavin, 2014; Mauleón, Daraio &
Bordons, 2014; Corsi & Zacchia, 2014; Danell & Hjerm, 2013; Tien, 2000, 2008), age
(Horodnic & Zait, 2015; Baccini et al., 2014; Costas, van Leeuwen & Bordons, 2010;
Rauber & Ursprung, 2008), income (Horodnic & Zait, 2015; Litwin, 2014; Sen, Ariizumi
& Desousa, 2014; Backes-Gellner & Schlinghoff, 2008), number of hours dedicated to
teaching activities, research and number of hours dedicated to administrative
activities, respectively (Horodnic & Zait, 2015; Baccini et al., 2014) (see Table A1 in
Appendix ).
To report the findings, we firstly describe the sample and provide insights about the
intention of doing research and/or publish by socio-economic variables. Secondly, as
our dependent variable is a dummy one, we employ a logistic regression analysis to
explore the association between the latent variables as well as the socio-economic
variables and academics’ intention to conduct research and/or to publish.
Findings
Of the 431 questionnaires completed by academics in economics and business
administration fields, and as Table 2 displays, 53 percent are women and 47 percent
are men. Some 10 percent of respondents in the sample were assistant professors, 30
percent Lecturers, 34 percent associate professors and 26 percent full professors. In
addition, those answering the questionnaire cover all age groups (most of them having
between 35 and 44 years old) and income intervals (most of them having a monthly
income between 2501 and 4500 RON) as shown in Table 2. The sample used in the
analysis, therefore, is well balanced according to gender, age, monthly income, and
academic degree.
338 Strategica 2016
Table 2. Sample structure, by socio-economic variables
Academics having Academics having
Sample
the intention to do the intention to
Socio-economic variables distribution
research publish
(%) (%) (%)
TOTAL (n = 431) 100 89 82
Female 53 90 83
Gender
Male 47 87 80
25-34 years old 23 90 80
35-44 years 39 93 83
Age
45-54 years 20 87 83
54+ years 18 78 81
less than 1500 11 91 79
RON
Monthly 1500-2500 RON 31 88 77
Income# 2501-4500 RON 37 88 81
4501-6500 RON 15 89 89
over 6500 RON 6 93 93
Assistant 10 93 88
Professor
Academic Lecturer 30 90 77
Degree Associate 34 90 81
Professor
Professor 26 84 86
# 1 EUR = 4.4450RON (average exchange rate for 2015, according to the National Bank of
Romania).
To start displaying the uneven distribution of intention to do research and to publish
in highly ranked journals, Table 2 also reports the socio-economic variations. This
reveals that the intention to do research is more prevalent amongst females (90
percent), academics between 35 and 44 years old (93 percent), with the highest
monthly income (93 percent), or just starting their careers (93 percent in the case of
assistant professors). Meanwhile, the intention to do research is relatively less
prevalent amongst academics over 54 years (78 percent) and those having achieved
the rank of full professor (84 percent).
Similarly, the intention to publish in highly ranked journals is more prevalent amongst
academics with high income (between 4501 and 6500 RON and over 6500 RON with
89 and 93 percent respectively) or just starting their careers (88 percent in the case of
assistant professors). Interestingly, in the case of full professors or academics over 54
years old, the number of those expressing their intention to publish is higher than the
number of those expressing their intention to do research. However, this can be
explained by the supervisory role of full professors or experienced researchers.
Analyzing these descriptive statistics, the tentative conclusion is that, with small
deviations of the mean sample by socio-economic characteristics, a large majority of
academics have expressed their intention to do research and even to publish in highly
ranked journals (89 and 82 percent respectively). Yet, alongside with socio-economic
variables, what factors identified in the economics of science literature can explain the
academics’ intentions for doing research and publishing in economics and business
administration?
Modelling and Prediction in Marketing and Management 339
Table 3. Logistic regressions of the intention to do research and publish in economics and
business administration
Model 1 Model 2
Variables Intention to do research Intention to publish
se( ) Exp( ) se( ) Exp( )
Enjoyment to do research 0.673 0.477 1.959 - 0.420 0.528
0.639
Subjective norms 0.512 ** 0.248 1.669 0.326 0.218 1.385
Self-efficacy 0.053 0.449 1.055 1.132 *** 0.378 3.101
Motivational support from 0.530 0.400 1.698 - 0.336 0.878
university 0.130
Technical support from - 0.270 0.933 0.519 ** 0.231 1.681
university 0.070
External support - 0.321 0.704 0.186 0.272 1.204
0.352
Externalities 0.540 * 0.276 1.715 0.084 0.228 1.088
Ease of doing research 0.680 0.447 1.974 1.654 *** 0.402 5.227
Ease of publishing in highly 0.289 0.413 1.335 0.093 0.360 1.098
ranked journals
Usefulness of research and 0.687 * 0.358 1.987 0.663 ** 0.302 1.940
publishing
Gender (Female)
Male 0.151 0.398 1.162 - 0.335 0.790
0.236
Age (25-34 years old)
35-44 years 0.466 0.585 1.593 0.091 0.444 1.095
45-54 years - 0.681 0.529 - 0.569 0.623
0.636 0.474
54+ years - ** 0.766 0.145 - 0.687 0.383
1.933 0.960
Monthly Income (less than
1500 RON)#
1500-2500 RON - 0.714 0.452 - 0.565 0.954
0.794 0.048
2501-4500 RON - 0.795 0.970 0.451 0.628 1.570
0.030
4501-6500 RON 0.711 0.954 2.037 1.316 0.831 3.729
over 6500 RON 0.846 1.160 2.331 1.233 1.111 3.432
Academic Degree (Assistant
Professor)
Lecturer - 0.824 0.790 - * 0.691 0.320
0.236 1.140
Associate Professor - 0.980 0.644 - 0.816 0.385
0.440 0.954
Professor - 1.154 0.643 - 0.995 0.604
0.442 0.505
Weekly teaching hours 0.017 0.035 1.017 0.018 0.030 1.018
Weekly research hours 0.031 0.021 1.031 0.028 0.019 1.028
Weekly administrative hours - ** 0.022 0.957 - 0.022 0.997
0.044 0.003
Constant - *** 1.968 0.001 - *** 1.859 0.001
7.343 8.863
N 431 431
Pseudo R2 0.2461 0.2899
340 Strategica 2016
Log likelihood -115.0715 -145.7824
χ2 75.14 119.05
p> 0.0000 0.0000
Notes:
Significant at *** p<0.01, ** p<0.05, * p<0.1 (standard errors in parentheses).
All coefficients are compared to the benchmark category, shown in brackets.
To analyze the effect of the various independent variables on the intention to do
research and publish in economics and business administration field, Table 3 reports
the results of a logistic regression analysis. Model 1 examines the intention to do
research while Model 2 examines the intention to publish in highly ranked journals.
Model 1 in Table 3 shows a statistically significant positive relation between subjective
norms and the intention to do research. Weak evidence was found in the case of
externalities and usefulness of research and publishing. As such, no significant
association is identified in relation to the other investigated latent variables. According
to the same model, not only are experienced academics (aged over 54 years)
significantly less likely to have the intention to do research but so too are those with a
large number of administrative hours. In other words, intention to do research
correlates negatively with the number of administrative hours. However, no evidence
is found to support an association with gender, monthly income, and academic degree.
Furthermore, when Model 2 in Table 3 analyses the intention to publish in highly
ranked journals, a positive relation with self-efficacy, technical support from the
university, perceived ease of doing research and perceived usefulness of research and
publishing is found. Excepting a weak association with an academic degree, (lecturers
are less likely to have the intention to publish than assistant professors), no
association is found between socioeconomic characteristics, teaching, research or
administrative load and the intention to publish in highly ranked journals.
Here, therefore, there is support for an existing relation between the intention to do
research and publish and some selected latent variables, namely subjective norms,
self-efficacy, technical support from the university, perceived ease of doing research
and perceived usefulness of research and publishing. To understand better the
relationship between these variables, Figure 1 and 2 show the predicted probability of
intention to do research and publish for a “representative academic” in economics and
business administration at different levels of these latent variables. The
“representative academic” is derived by taking the mean and modal values of the other
independent variables. Consequently, the “representative academic” in economic
administration is a female associate professor, aged between 35-44 years old with an
income between 2501-4000 RON, which on average spends 13.97 hours per week for
teaching, 14.21 hours for researching and 9.75 hours for administrative activities, and
have the mean values for the other latent variables used in the regression. As Figure 1
graphically shows, for this representative academic, as subjective norms, self-efficacy,
perceived ease of doing research and perceived usefulness of research and publishing
increases, the predicted probability of them having the intention to conduct research
increases as well. Interesting, however, is the inverse relation with the technical
support from the university. Yet, this association is not significant and the difference in
predicted probabilities is lower than 1 percent.
As for the intention to publish, for all analyzed variables a positive trend is identified.
When subjective norms, self-efficacy, technical support from the university, perceived
Modelling and Prediction in Marketing and Management 341
ease of doing research and perceived usefulness of research and publishing increases,
so too is the predicted probability to have the intention to publish in a highly ranked
journal (Figure 2). To be noticed that, in this case, the differences are much higher, as
for example about 70 percent in the case of perceived ease of doing research.
These results are in line with previous research which underlines the positive
association between organizational support and academics performance (Richard et
al., 2015; Vătămănescu et al., 2015; 2016) and the positive relation between self-
efficacy and the intention to conduct research in the future (Wright & Holttum, 2012).
Intention to do research Intention to do research
.973
.98
.972
.97
Predicted Probability
Predicted Probability
.96
.971
.95
.97
.94
.969
.93
.92
.968
1 2 3 4
1 2 3 4
Subjective norms
Auto-efficacy
Intention to do research Intention to do research
.974
.98
.972
.96
Predicted Probability
Predicted Probability
.97
.94
.92
.968
.9
.965
.88
1 2 3 4
1 2 3 4
Technical support from university Ease of doing research
Intention to do research
.98
.96
Predicted Probability
.94
.92
.9
.88
.86
1 2 3 4
Usefulness of research and publishing
Figure 1. Predicted probability of intention to do research for a “representative academic”
in economics and business administration
342 Strategica 2016
Intention to publish Intention to publish
.96
1
.9
.94
Predicted Probability
Predicted Probability
.8
.92
.7
.9
.6
.5
.87 .88
.4
1 2 3 4 1 2 3 4
Subjective norms Auto-efficacy
Intention to publish Intention to publish
.98
1
.96
Predicted Probability
.8
Predicted Probability
.94
.92
.6
.9
.4
.88
.2
.85
1 2 3 4 1 2 3 4
Technical support from university Ease of doing research
Intention to publish
.95
.9
Predicted Probability
.85
.8
.75
.7
1 2 3 4
Usefulness of research and publishing
Figure 2. Predicted probability of intention to publish in a highly ranked journal for a
“representative academic” in economics and business administration
Conclusion
Previous studies have shown that there are multiple socio-demographic characteristics
as well as motivational factors that influence the academics’ research productivity. Our
study investigated the prior behavior, namely the intention of doing research and to
publish in highly ranked journals as for reaching the final goal (i.e. a high research
productivity) it is necessary first to have the intention do to so (attitudinal changes).
Using data from a self-administrated survey of economics and business administration
Modelling and Prediction in Marketing and Management 343
academics in Romania, our study shows that subjective norms, self-efficacy, perceived
ease of doing research and perceived usefulness of research and publishing are
associated with the academics’ intention to do research and/or to publish in highly
ranked journals. These results provide support for managers at local, national and
international bodies. Firstly, it helps to understand their staff behavior in order to act
on motivating them to conduct research and publishing activities. Secondly, the results
provide insights for predicting the evolution of research and publishing activities for
the existing staff, and thirdly, it provides tools to universities for hiring new people,
based on their research and publishing predicted potential.
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APPENDIX
Table A1. Descriptive statistics of the variables used in analysis
Variables Description Mode or mean
Intention to do Dummy variable for academics intention to get
Yes (89%)
Dependent
research involved in research in the next year
Dummy variable for academics intention to
Intention to publish Yes (82%)
publish in highly ranked journals in the next year
Enjoyment to do Average mean of 8 items measuring Enjoyment to
3.33
research do research Index
Average mean of 2 items measuring Subjective
Subjective norms 2.87
norms Index
Average mean of 9 items measuring Auto-efficacy
Auto-efficacy 3.28
Index
Motivational
Average mean of 7 items measuring Motivational
support from 1.94
support from university Index
Independent
university
Technical support Average mean of 3 items measuring Technical
2.21
from university support from university Index
Average mean of 3 items measuring External
External support 2.05
support Index
Average mean of 3 items measuring Externalities
Externalities 2.99
Index
Ease of doing Average mean of 4 items measuring the
2.94
research perceived Ease of doing research Index
Ease of publishing in Average mean of 3 items measuring the
2.92
highly ranked perceived Ease of publishing in highly ranked
346 Strategica 2016
journals journals Index
Usefulness of Average mean of 8 items measuring the
research and perceived Usefulness of research and publishing 3.13
publishing Index
Gender Dummy variable for the gender of the respondent Female (53%)
35-44 years
Age Respondent age in intervals
(39%)
2501-4500
Monthly Income Respondent monthly income (RON) in intervals
RON (37%)
Associate
Academic Degree Respondent academic degree in categories Professor
(34%)
Weekly teaching Respondent declared number of teaching hours
13.97
hours per week
Weekly research Respondent declared number of research hours
14.21
hours per week
Weekly
Respondent declared number of administrative
administrative 9.75
hours per week
hours
Notes:
For the latent variables, the questions were measured using a Likert scale, ranging from 1 “never
or almost never true about me or my university” to 4 “always or almost always true about me or
my university”. We here provide the mean of the questions used for measuring latent variables.
The dummy dependent variables were obtained by recording the answers as follow: value 0 (no)
for original values 1 and 2 and value 1 (yes) for original values 3 and 4.
Modelling and Prediction in Marketing and Management 347
WHY EXTENDING EXAMINATION WITH NON-PARAMETRIC
APPROACHES? INSIGHTS FROM A STUDY ON ADVERTISEMENT'S
EFFECTIVENESS
Andreia Gabriela ANDREI
“Alexandru Ioan Cuza” University of Iasi, Romania
22 Carol I Blvd., 700505 Iași, Romania
andrei.andreia@gmail.com
Adriana ZAIȚ
Faculty of Economics and Business Administration
“Alexandru Ioan Cuza” University of Iasi, Romania
22 Carol I Blvd., 700505 Iași, Romania
adrianazait@yahoo.com
Elena-Mădălina VĂTĂMĂNESCU
Doctoral School in Economics and International Business
Bucharest University of Economic Studies
6 Piața Romană, 010374, Bucharest, Romania
madalina.vatamanescu@yahoo.com
Abstract. The paper presents the findings of an experimental study investigating
advertisement effectiveness. It analyzes the similarities and the differences in consumers’
responses to an advertised offer, as a function of emphasis framing (hedonic vs.
utilitarian). The paper examines collected dataset using two different approaches: the
analysis of variance (ANOVA) and the partial least squares multi-group analysis (PLS-
MGA). Results derived from the two different approaches are compared and discussed,
highlighting the additional findings gained via PLS-MGA regarding the moderating role
of emphasis framing on the relationship between perceptions and purchase intentions.
Testing the parametric differences arising from between groups design, ANOVA provides
limited findings, while the non-parametric approach - PLS-MGA - estimates the effects of
the experimental conditions on the structural model parameters, offering additional and
more accurate results. Concluding that non-parametric approaches allow enhanced
investigations, the paper explains why researchers should sometimes extend data
examination using variance-based structural equation modeling as an exploratory tool.
Keywords: PLS-MGA; ANOVA; purchase intention; hedonic and utilitarian; advertising.
Introduction
The impact of hedonic and utilitarian motivations on people's decisions has been
heavily analyzed in social sciences, including consumer research and marketing
literature (Ahtola, 1985; Batra & Ahtola, 1990; Crowley, Spangenberg & Hughes, 1992;
348 Strategica 2016
Hirschman, 1983, 1984, 1992; Hirschman & Holbrook, 1982; Holbrook & Hirschman,
1982; Holbrook, 1986).
Extant marketing studies have shown how hedonic and utilitarian frames of reference
alter consumption goals, motivation focus, perceived benefits and buying decisions
differentiating consumer reactions (Babin, Darden & Griffin, 1994, Dholakia, 2000;
Spangenberg, Voss & Crowley, 1997; Khan, Dhar & Wertenbroch, 2004; Khan & Dhar,
2010; Parker & Wang, 2016; Kivetz & Zheng, 2016).
Considering previous findings on hedonic versus utilitarian purchase behaviors,
showing that consumers respond differently to marketing communications efforts and
promotions (Khan et al. 2004; Khan & Dhar, 2010; Kivetz & Zheng, 2016), our study
assumes that different reactions might result in response to the same advertised offer
from people using mostly hedonic (vs. utilitarian) lens of evaluating it, and it aims to
find out ways of improving the advertising techniques.
Literature review
Considering utilitarian motivation to be based on necessity and the practical utility
provided by the acquired good, while hedonic motivation to be based on pleasure and
enjoyment (Ahtola, 1985; Batra & Ahtola, 1990), scholars agreed that each time people
are buying, both hedonic gratification and utilitarian benefit counts, contributing in
different proportions to the final decision (Hirschman & Holbrook, 1982; Babin et al.,
1994; Parker & Wang, 2016).
Still, the relative weight of hedonic or utilitarian value enables people to perceive
goods as primarily hedonic or primarily utilitarian (Batra & Ahtola, 1990). Although
hedonic and utilitarian components are combined in each case, those products that are
seen to primarily provide superior hedonic value are labeled as hedonic goods, and
those that are seen to primarily provide superior benefits of utilitarian nature are
labeled as utilitarian goods (Batra & Ahtola, 1990; Dhar & Wertenbroch, 2000).
Since the hedonic value of goods relates to consumer's pleasure, experiential and
sensorial satisfaction and utilitarian value is functional and task-related, the products
with higher utilitarian value represent the most part of daily purchases (Khan et al.,
2004).
Although hedonic goods are more appealing, the guilt of indulging (Kivetz & Keinan,
2006; Keinan & Kivetz, 2008) and people's concern of providing themselves reasons
that justify their decisions were found to lead consumer's tendency to frequently
postpone hedonic acquisitions (Khan & Dhar, 2010; Kivetz & Zheng, 2016).
Researchers have shown that consumers efforts to adopt prudent spending decisions
directed to the fulfillment of objective needs, and the increased urge for justifying
those acquisitions that are rather motivated by pleasure than utility determine a
reduced frequency of hedonic (vs. utilitarian) purchases.
However, some of the marketing actions, such as non-quantity sales promotions, were
found to act as external guilt-reducers, providing a perfect reason to justify hedonic
goods buying (Kivetz & Zheng, 2016). More precisely, studying promotions influences
Modelling and Prediction in Marketing and Management 349
on hedonic vs. utilitarian acquisitions Kivetz and Zheng (2016) have found a higher
effectiveness of price promotions on buying decision of hedonic rather than utilitarian
goods for the case of price-per-unit discounts and other non-quantity promotions.
Explained by the increased difficulty of justifying hedonic (vs. utilitarian) buying, non-
quantity promotions were found to more effectively motivate hedonic (vs. utilitarian)
acquisitions. As expected, reversed reactions were found for the case of quantity
promotions (i.e. discounts for the acquisition of additional product units), because the
difficulty to justify additional units buying of a hedonic good countervailed the benefit
of the discount (Kivetz & Zheng, 2016).
On the other hand, consumer behavior literature have shown that people tend to be
less price sensitive in their acquisition decisions if hedonic aspects of perceived value
weigh more (Khan et al., 2004).
The decreased price sensitivity of hedonic (vs. utilitarian) acquisitions was understood
in connection with buying low frequency and occasional consumption of hedonic
goods. People's proneness to accept higher prices for buying goods of superior hedonic
value was explained as a consequence of enjoyment motivation, pleasure associations
and luxury desirability associated with occasional consumption (Khan et al., 2004).
Analyzing hedonic and utilitarian aspects into greater depth, Igou (2011) revealed the
link between motivation focus on hedonic (vs utilitarian) benefits and the differences
appearing in the priorities of goals and expectations that are configuring different
information processing styles, different “mindsets” used for evaluation. The author
pointed out the difference between “a hedonic mindset” focused on experiences and
sensations, that uses a “valuation-by-feeling strategy” of evaluation, versus a
“utilitarian mindset” focused on functionality that uses a “valuation-by-calculation
strategy” of information processing, concluding that the “utilitarian mindset is more
likely to promote cost-benefit analyses” (Igou, 2011), which totally explains the
decreased price sensitivity in hedonic (vs. utilitarian) acquisitions.
Taking into account the information processing differences between hedonic vs.
utilitarian “mindsets” presented by Igou (2011) as well as previous analyses on goal
frames showing that a change of focus determines a change in “the way people process
information and act upon it” (Lindberg and Steg (2007, p.118) we assumed that
different reactions might result in response to the same advertised offer from people
using mostly hedonic (vs. utilitarian) lens of evaluating it. Further, considering the
increased sensitivity to emotional cues and decreased price sensitivity in hedonic (vs.
utilitarian) goods acquisition indicated in the literature (Khan et al., 2004), we
hypothesized that:
Hedonic (vs. utilitarian) framing influence advertisement's effectiveness, moderating the
effect of perceptions on intentions as follows:
H1: hedonic (vs. utilitarian) framing increases the positive effect of perceptions on
purchase intentions.
H2: hedonic (vs. utilitarian) framing increases the positive effect of perceptions on
recommending intentions
350 Strategica 2016
Methodology
Data collection
The hypothesis that hedonic (vs. utilitarian) framing influence advertisement's
effectiveness, moderating the effect of perceptions on purchase (H1) and recommending
(H2) intention was tested using a between groups experimental study conducted with
student participants (N=80, 50% F, M age =23).
Participants were invited to rate their opinions about a food delivery offer and its
offerer based on the information contained in the advertisement presented during the
study, being exposed to the same information excepting advertisement's call for action
phrase, which emphasized either hedonic or utilitarian aspects between groups.
Participants’ responses (1 to 7 ratings) concerning impressions about the product, the
price-level, and additional offer-related opinions were collected as single-item
variables, while the intention of purchasing and recommendations spreading, as well
as participant's perceptions regarding the offerer, were measured using the multi-item
constructs presented in Table 1.
The advertisement presented under an unknown brand-name a fast (“15 minutes”)
delivery offer for healthy (“100% natural ingredients”) cooked meals, in order to
facilitate hedonic (vs. utilitarian) framing, and to control for external influences (such
as ambiance factors known to play important roles in consumer's evaluations of
restaurants for example), or response variations between participants that might
occur when judging complex, high-tech or rare consumption products.
The joy of eating, traditional cooking and sensorial hints were emphasized in the
introductory call for action phrase to prompt participant's attention to hedonic side of
the advertised offer in one group (“Enjoy our traditional food, cooked from 100%
natural ingredients, baked in the wood-fired brick oven directly on hot bricks for
having a healthy, full of tasty meal delivered hot at your door...”) while speed,
forwardness, modernity, mobile ordering add-ons (functional benefits) were
emphasized in the other group to prompt participant's attention to utilitarian side of
the advertised offer (“Enjoy a fast 15 minutes delivery and order our 100% natural
ingredients food by phone call, website or mobile applications...”).
Pretests performed with student participants (N = 18, 50% female, ages 20-30)
indicated a successful framing: hedonistic considerations were significantly higher in
one group (M =5.08 vs. M= 4.22, t(16) = 3.1, p = .007) and utilitarian aspects were
significantly higher in the other (M = 3.88 vs. M = 5, t(16) = 3.498, p = .003).
Data Analysis
The similarities and the differences concerning participants’ reactions to the
advertised offer were analyzed as a function of hedonistic (vs. utilitarian) framing,
using a parametric (ANOVA) and a non-parametric (PLS-MGA) method. Obtained
results were compared and conclusions were drawn.
Modelling and Prediction in Marketing and Management 351
Results
Collected data were processed and compared between experimental conditions. Group
means indicated good and very similar perceptions and behavioral intentions in both
conditions, as it can be observed from statistics reported below.
Parametric analysis indicated no significant differences between groups, ANOVA
results suggesting that participant's response to the advertised offer would be very
much the same regardless hedonistic or utilitarian framing. No differences between
groups on perceptions (CP – competence perception; WP - well-intended perception,
price-level (P) or intentions (RI - recommend intention; PI – purchase intention) were
found:
P: F(1,78)=0.011, p=0.917; M=5.4250 vs. M =5.4500;
CP: F(1,78)=2.060, p=0.155; M=4.8438 vs. M =5.1125;
WP: F(1,78)=1.728, p=0.192; M=4.5563 vs. M =4.2688;
RI: F(1,78)=0.001, p=0.973; M=4.1000 vs. M =4.1083;
PI: F(1,78)=0.001, p=0.974; M=4.6500 vs. M =4.6563;
ANOVA results rejected our assumption regarding the differences in advertisement's
effect on behavioral intentions, depending on hedonic (vs. utilitarian) framing.
Still, the increased sensitivity to emotional cues and decreased price sensitivity in
hedonic (vs. utilitarian) goods acquisition indicated in the literature (Khan et al., 2004)
justified our expectations of between groups differences, especially regarding
purchasing intentions.
Therefore, we decided to investigate further, and we resorted to the non-parametric
analysis before concluding that our data rejects all research hypotheses.
PLS-SEM and MGA analysis and results
Before concluding that hedonistic (vs. utilitarian) framing wouldn't interfere in
adjusting consumer responses to the advertised offer, an additional groups
comparison was performed using structural equation modeling (SEM) and partial least
squares multi-group analysis (PLS – MGA).
Examining the relationships between perceptions and intentions (figure 1) in each
group and comparing corresponding path coefficients between experimental
conditions, we considered that PLS – MGA offers the possibility to capture more subtle
aspects that cannot be observed with parametric analyses.
Finally, the decision of employing a variance -based SEM technique was rooted on the
extant recommendations indicating PLS-SEM use for explanatory analysis (Lowry and
Gaskin, 2014).
Therefore we applied PLS-SEM method as indicated in Hair, Hult, Ringle, and Sarstedt
(2014); Hair, Sarstedt, Hopkins, and Kuppelwieser (2014), and we performed the
measurement and the structural model evaluations for each group resulted from
hedonistic (vs utilitarian) framing. In the end, groups differences were estimated on
352 Strategica 2016
the structural model parameters using PLS – MGA analysis according to Sarstedt,
Henseler and Ringle (2011) and the final conclusions were drawn.
Model evaluation on each group
The model presented in Figure 1 indicates all potential relationships between
participants perceptions (CP and WP) and intentions (purchase – PI; recommend - RI)
resulted in response to the advertised offer, as well as the hypothesized moderating
effect of framing on these relationships.
To perform the PLS – MGA evaluation of the moderation that (hedonic vs. utilitarian)
framing might exert on the effect of perceptions (CP; WP) on intentional response (PI,
RI) to the advertised offer, the relationships between perceptions and intentions
(Figure 1) should be analyzed for each group, and groups differences should be
estimated on the structural model parameters, according to literature
recommendations (Henseler, Ringle & Sinkovics, 2009; Sarstedt et al., 2011).
Figure 1. Research model
Measurement evaluation
In both hedonic and utilitarian groups PLS-SEM statistics point out that measurement
model complies to method's recommendations of reliability (Nunnally, 1978); no
cross-loadings (Chin, 1998); convergent and discriminant validity (Fornell and
Larcker, 1981) - as indicated in Hair et al.. (2014) and detailed in the results reported
in Table 1 (AVE > 0.5, Cronbach's alpha > 0.7, CR > 0.8), Table2 (no cross-loadings
between construct's indicators) and Table 3 (discriminant validity criterion introduced
by Fornell and Larcker, 1981).
Modelling and Prediction in Marketing and Management 353
Table 1. Measurement model: construct reliability and convergent validity
Construct and items Utilitarian Group Hedonic Group
ά CR AVE ά CR AVE
CP (reflective construct: CP1; CP2; 0.798 0.868 0.623 0.814 0.877 0.641
CP3; CP4)
WP (reflective construct: WP1; WP2; 0.777 0.856 0.602 0.924 0..946 0.814
WP3; WP4)
RI (reflective construct: RI1; RI2; RI3) 0.796 0.881 0.713 0.928 0.954 0.875
PI (reflective construct: PI1; PI2; PI3) 0.885 0.930 0.815 0.865 0.918 0.788
Table 2. Cross Loadings
Correlations between Utilitarian Group Hedonic Group
indicators and composite
scores CP PI RI WP CP PI RI WP
CP1 0.713 0.425 0.065 0.039 0.775 0.533 0.376 0.309
CP2 0.864 0.453 0.342 0.403 0.784 0.602 0.557 0.377
CP3 0.804 0.488 0.319 0.381 0.828 0.663 0.559 0.510
CP4 0.767 0.396 0.332 0.193 0.814 0.697 0.414 0.369
PI1 0.562 0.955 0.582 0.559 0.740 0.928 0.661 0.476
PI2 0.450 0.918 0.526 0.475 0.605 0.890 0.720 0.466
PI3 0.493 0.832 0.380 0.417 0.725 0.842 0.667 0.559
RI1 0.458 0.535 0.941 0.605 0.595 0.727 0.955 0.738
RI2 0.284 0.536 0.778 0.449 0.651 0.819 0.954 0.660
RI3 0.104 0.334 0.806 0.538 0.430 0.597 0.896 0.656
WP1 0.286 0.506 0.575 0.771 0.363 0.573 0.720 0.903
WP2 0.279 0.431 0.502 0.866 0.507 0.535 0.666 0.940
WP3 0.339 0.493 0.507 0.832 0.404 0.434 0.550 0.860
WP4 0.125 0.156 0.435 0.608 0.518 0.489 0.690 0.903
Table 3. Discriminant Validity: Fornell-Larcker Criterion
Construct Utilitarian Group Hedonic Group
CP PI RI WP CP PI RI WP
CP 0.789 0.801
PI 0.558 0.903 0.784 0.888
RI 0.352 0.555 0.845 0.603 0.768 0.935
WP 0.346 0.540 0.655 0.776 0.496 0.567 0.733 0.902
354 Strategica 2016
Structural model evaluation and groups comparison
The PLS-MGA analysis with 5000 bootstrap samples was performed in SmartPLS 3
software (Ringle, Wende & Becker, 2015).
The structural model was evaluated for each group (see Figure 2, Table 4, Table 5)
according to Hair, Hult, Ringle and Sarstedt (2014), and between groups differences
were estimated on the structural model parameters (results reported in Table 6),
according to Henseler et al. (2009), Sarstedt et al. (2011).
Structural model evaluation has shown that coefficients of determination R2 (Table 4)
are significant for each group.
Table 4. Structural model: coefficient of determination
Utilitarian Group Hedonic Group
Construct
R2 R2
PI 0.449 0.657
RI 0.447 0.613
β paths coefficients and statistical significance of the observed relationships (Table 5)
indicate two effects that are significant in both groups: CP -> PI (β(hedonic) = 0.667, p
< 0.001 and β(utilitarian) = 0.422, p < 0.001) and WP -> RI (β(hedonic) = 0.576, p <
0.001 and β(utilitarian) = 0.606, p < 0.001).
2
Figure 2. Structural model: R and β path coefficients for both groups
2 2
(R and β in hedonic “frame”– normal fonts; R and β in utilitarian “frame” – smaller fonts and marked)
Modelling and Prediction in Marketing and Management 355
Table 5. Structural model: the effects of perceptions on intention
Utilitarian Group Hedonic Group
Effects
β T P 2.5% c.i. 97.5% c.i. β T P 2.5% c.i. 97.5% c.i.
CP→ PI 0.422 3.882 0.000 0.160 0.606 0.667 6.806 0.000 0.470 0.855
CP→ RI 0.143 1.144 0.253 -0.114 0.372 0.317 3.015 0.003 0.077 0.504
WP→ PI 0.394 3.648 0.000 0.154 0.585 0.236 1.734 0.083 -0.047 0.474
WP→ RI 0.606 6.222 0.000 0.368 0.761 0.576 5.853 0.000 0.323 0.728
As reported in Table 6, Parametric test and Welch-Satterthwait test fail to find
differences between groups.
Still, the PLS-MGA non-parametric analysis indicate a significant effect difference at p <
0.05 between groups (see Sarstedt et al., 2011) arising from a significantly higher
influence of CP on PI in hedonic (vs. utilitarian) condition (|β(hedonic)–β(utilitarian)|)
=0.245; p-value(hedonic vs. utilitarian) =0.042) which shows the moderating role of
framing on the relationship between CP and PI.
H1 hypothesis is partially confirmed by PLS-MGA results: hedonic (vs. utilitarian)
framing increases the positive effect of competence perception on purchase intention.
No other significant effect differences were found between groups (see Table 6): the
H2 hypothesis is rejected.
Results reveal that the results of both methods, ANOVA and PLS-MGA, reject H2
hypothesis and framing (hedonic vs. utilitarian) influence on the relationship between
perceptions and recommendations spreading. Yet, only ANOVA rejects the H1
hypothesis, while PLS-MGA offers supportive evidence for H1, indicating the
moderating effect of framing (hedonic vs. utilitarian) on purchase intention.
Table 6. Group comparisons: Hedonic vs. Utilitarian (H vs. U)
Effects Effect diff. T Parametric test Welch-Satterthwait PLS-MGA
(H vs. U) |β (H) - β (H vs. U) p-value p-value p-value
(U)| (H vs. U) (H vs. U) (H vs. U)
CP→ PI 0.245 1.651 0.103 0.107 0.042
CP→ RI 0.174 1.067 0.289 0.293 0.145
WP→ PI 0.158 0.926 0.357 0.360 0.819
WP→ RI 0.030 0.214 0.831 0.832 0.578
Conclusions and research limitations
Indicating the moderating role of framing on purchase intention, results revealed that
prompting consumer's attention to the hedonic side of the advertised offer through an
introductory call for action, the advertisement's effectiveness would increase, because
(hedonic vs. utilitarian) framing magnifies the positive effect of perceived competence
on purchase intention.
356 Strategica 2016
Besides direct implications for advertising techniques in food delivery field, the result
also indicates that adding a hedonic appeal to the rational benefits (such as healthy
food), organic food producers might increase their sales.
Although result application would provide important advantages for business practice,
research limitations indicate that it should be used with caution in other settings. In
this regard, we remind the very specific context of the present study: a healthy
product; food delivery field. Moreover, we highlight that the study used hedonic (vs.
utilitarian) framing to find out which one would increase the effectiveness of a specific
advertisement. Further research is needed to extend investigation and to find out
result applicability in other situations and activity fields.
Overall, our paper has the merit of depicting an important methodological issue.
It shows that researchers should sometimes extend data examination using non-
parametric approaches, despite the fact that ANOVA is an established method for the
analysis of experimental results in marketing and behavioral studies.
As our results have shown, assessing only the mean differences arising from between
groups design ANOVA technique failed to identify underlying behaviors, rejecting the
assumed differences in advertisement's effect on behavioral intentions depending on
hedonic (vs. utilitarian) framing, while the non-parametric approach, PLS-MGA, offered
supportive evidence for the moderating effect of framing on purchase intention,
offering insights of immediate applicability and high managerial value.
Concluding that non-parametric approaches offer the possibility to estimate the effects
of between groups design on the structural model parameters allowing enhanced
investigations, paper's results recommend PLS-MGA as a valuable instrument for
explanatory analysis in between groups experiments. Calculating estimates that allow
assessing the effects and explain consumers behaviors into greater depth, PLS-MGA (in
our particular case), and variance based SEM (in general) provides more accurate and
detailed explanations of consumer behaviors than parametric techniques, offering
additional and valuable insights.
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Modelling and Prediction in Marketing and Management 359
FORECASTING CONSUMERS’ STANDPOINTS ON THE
EUROPEAN E-COMMERCE
Elena-Alexandra GORGOS
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
alexa_elena85@yahoo.com
Elena-Mădălina VĂTĂMĂNESCU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
madalina.vatamanescu@facultateademanagement.ro
Abstract. The European Union has settled facilitating transactions within a single
market as a primary aim. Consumers’ rights and protecting their safety are priorities for
the European Union, alleging a partnership between member states and citizens.
National legal systems represent the first problem in applying European rules because
contract laws are different in many aspects, as many authors posit. The interest of this
paper is finding out if consumers consider themselves well-informed, and which are the
main channels used with a view to feeling comfortable and to trusting European market
dynamics. Consumers’ opinions about the efficiency of online communication have a
double impact on the social spectrum: being adaptive or being repellent. Hereby, the
research questions are: 1) Is consumers’ communication endeavoring the European
spirit?; 2) Has online communication diluted barriers in Europeans’ perceptions about a
common market?; 3) Has online communication system delineated economic
transactions?. Our approach is from a social-cognitive perspective, acknowledging the
importance of behavioral communication in economic boundaries. The environment in
which consumers work or spend spare time determines and influences their acts,
attitudes and social behavior. In order to understand how consumers’ look at the
European Union’s interest in being more open to citizens and to how their social behavior
in the online area can mark the way consumers react to European goods, we resorted to a
qualitative research, with in-depth interviews. Investigating the bond between
consumers’ trust and consumers’ acts in acquiring European services brings into light the
fact that communication remains unavoidable and compulsory for gaining citizens’
credential regardless of the frame of reference.
Keywords: consumer; European legislation; online communication; e-commerce.
Introduction
Our permanently changing society is based on consumption and, for this reason, it is
necessary to thoroughly study the habits and lifestyle of consumers. Consumers are
continuously seeking information and desire to be consistently informed about
products and the purchase alternatives (Dinu, Marchevski, Dobrescu & Petrescu,
2010). Even if the European legislator makes effort in creating a unique enactment in
the commercial field, the interpretation of laws remains an unfinished discussion
(Loos, 2016). Cross-border trade depends on the retailers’ preparation to deliver the
360 Strategica 2016
products to other member states and their willingness to engage with citizens who
have a different culture and expectations. Here, the emergence of litigations is a
negative aspect for the consumer’s confidence in online acquiring (Macsim, 2012).
The correlations that consumers make with their past experience or with their product
knowledge are essential for understanding the true meaning of information. According
to De Mooij and Hofstede (2011), the flow of communication can set itself up as an
obstacle in buying or, on the contrary, it may encourage acquisitions. Studying online
searches reveals citizens’ intentions turning into actions in the near future (Goel et al.,
2010) whereas the online interaction between consumers and producers induces a
new idea of consumption and of business administration.
In this vein, admitting the importance of adhering to a more cohesive Europe in terms
of legislation and spirit, the present paper aims to deliver Europeans’ expectations
about e-commerce and online communication regarding commercial relations. Bearing
this in mind, the paper is structured in three parts: the theoretical part covers two
main directions (e-commerce and consumer behavior), the second part presents the
methodology which was used to scrutinize the citizens’ points of view and the last part
is merely empirical, describing the findings emerged from 12 in-depth interviews with
young citizens, who use online services for ordering products. The research questions
are: 1) Is consumers’ communication endeavoring the European spirit?; 2) Has online
communication diluted barriers in Europeans’ perceptions about a common market?;
3) Has online communication system delineated economic transactions?
Our work had as a foundation the assumption that e-commerce and European rules for
protecting consumers are incentives for feeling secure on the European market and for
endeavoring the European spirit and enhancing a feeling of belongingness to the
European whole.
Literature review
Consumer’s protection in the European environment
The terms and conditions imposed by the EU concerning contracts mark surveillance
of European transactions, conducting activities through specialized organizations for
ensuring respect of general rules (Binding & Purnhagen, 2011). The law on consumer
protection contains issues concerning contracts, product liability, price indication,
claims and guarantees, compensation and the right to be informed about the offered
services and acquired products (Ene, 2012). In the EU, the consumer protection sector
has gained weight in the European framework. If consumers’ complaints were made
public, it would be easier to establish revisions of national legislation in order to
entirely conform to the European laws about consumers and common market.
The EU is interested in bonding with its citizens and this can be achieved only through
promoting EU ideas, services, and commercial space. Consumers’ education is linked to
the control of financial situations whereas the acts of consuming products and services
denote the type of consume and satisfaction of personal needs (Dinu et al., 2010).
Consumer’s protection is founded on two directions: national authorities must control
consumers’ behavior in an adequate way, and at the same time, consumers have to be
Modelling and Prediction in Marketing and Management 361
encouraged to defend their rights and to put pressure on providers when needed
(Dinu et al., 2010, p.721).
The harmonizing legislation is noteworthy when discussing trading in the EU (Howells,
2006; Loos, 2016). The national laws of the member states can be driven in the same
direction without entailing uniformity (Howells, 2006). The legislation of the EU tries
to protect consumers from behaviors and practices which are considered aggressive to
business. Accurate rules bring gains for traders and an open area of information for
customers, who will already know what to expect from an online contract, no matter
the company he buys from. In this manner, a barrier of transnational commerce is
driven away (Macsim, 2012).
The EU strives to make citizens aware of non-loyal practices in the selling area and to
adopt a negative behavior towards these unwanted practices (Nicula, Oneţiu, &
Todoran, 2015). E-commerce privacy is one of the most important rights for
consumers. Commercial activity implies the utilization of electronic means and, in the
EU, the personal property contains personal data, being protected by European
legislation and, from this standpoint, the EU has advanced legislation for protecting e-
commerce, insisting on privacy protection (Guo, 2012).
The main problem with online contracts is that they are not written; they are tacit
agreements and, from this perspective, the validity of these contracts is put into
question. The system of digital signatures ensures the completion of covenants (Guo,
2012).The problems that can intervene between a European consumer and a trader
from the EU can be solved outside the court system taking into account contractual
obligations of the involved parts, through the procedures of an ADR (alternative
dispute resolution) entity, a third party which has the power to mediate consumer
cases (Loos, 2016).
The right of withdrawal is specific only to consumers, who can denounce an already
performed online contract, without motivating the decision of withdrawal. The
consumer does not have an equal position on the market in comparison with the
economic power of the trader, so European directives try to protect consumers and to
encourage e-commerce and the empowerment distribution (Macsim, 2012).
An author who has studied ways of embedding conflicts between traders and
consumers is Loos (2016), who endorses the study of consumers’ behavior in treating
alternative dispute resolution (ADR) information, stressing that the ordinary
consumer does not invest time in reading pre-contractual obligations or rights and that
he becomes interested only when he has a dispute with the provider or trader. The
European legislator has focused on cross-border situations and has contributed to the
development of ADR procedures. The appeal to this procedure is voluntary, neither the
consumer, nor the trader is obliged to resort to this non-jurisdictional manner to
resolve a dispute.
The harmonization of rules in the commercial area is a political issue more than a legal
one; respecting the same set of rules may cause problems at the time of its appliance.
The process of implementation is the most burdensome trial; National Courts are
responsible for interpreting and assuming the establishment of European laws’
appliance (Howells, 2006). Referring, for instance, to the European Court of Justice, its
362 Strategica 2016
duty is to interpret European rules, without deviating from the right course of the
regulation. From 13th of June 2014, the European Directive number 2011/83/EC has
replaced other Directives concerning distanced contracts and contracts negotiated
away from business premises (European Commission, 2016).
Online trade fosters cross-border relations between consumers and traders, the
comparison between the number of complaints and the number of online orders
indicating the existent problems and the transparency of commercial tools (Kuneva,
2009). Digital internal market has a potential which has not been yet entirely
approached (Macsim, 2012). Domestic e-commerce is more developed than cross-
border e-commerce, due to the fact that consumers feel more secure knowing that the
provider has its headquarters or at least an agency in their country (Macsim, 2012).
Furthermore, citizens have to pay additional costs when buying from abroad.
The authorities have the power to impose regulations within the market area and can
promote competition and ensure consumers’ fundamental rights. Some of the most
important issues are getting informed, educated, protecting interests, free choice and
representation of consumers (Nicula et al., 2015). In order to reach an improved
activity in the field of consumer protection, the government has to invest more in
providing quality training and other forms of higher education: courses, masters,
specialized sessions, programs of qualification and so on (Dinu et al., 2010).
Consumers’ trust can be gained also through the implication of independent
organizations which are assigned by the EU, for making claims in the name of the
rightful consumers (Binding & Purnhagen, 2011).
The legal environment for consumers is a task that must be very well established
because gaining confidence is an important goal for sellers and producers. Consumers
not only buy goods and use services, but they need to be secure from a legal
standpoint, a fact which gives them confidence in buying and that offers protective
measures after buying (Guo, 2012; Howells, 2006).
Bringing “consumer-trader” relation to the forefront of the approach, the problem with
Romanian consumers is the lack of information concerning their main interests as
citizens, especially when producers or traders overrun consumers’ rights (Albu &
Nedelea, 2006). Consumers’ rights at the EU level enhance the trust of Europeans in
their own system and represent an advent for leaving behind economic and cultural
factors differentiating European citizens. Communicating laws and means of redress to
European citizens by specialized institutions overcomes actual barriers in
communication, through different forms such as organizing public campaigns (Rogers,
2015).
Universities are perceived as “key players” for assuming educational programs and
have the potential to direct people for touching a satisfactory degree of knowledge, in
compliance with EU regulations (Dinu et al., 2010, p.732). In this vein, Koch-Mehrin
(2009) supported the educational systems for shaping good consumers, asserting
however that the European consumer policy has to be valuable in treating different
issues, but not too detailed because a lot of citizens have accused European institutions
of too much bureaucracy.
Modelling and Prediction in Marketing and Management 363
Producers approve to enlarge their area of activity in online services with cross-
borders orders once the EU legislator assesses common rules for all member states for
being sure that they do not encounter legal difficulties in solving eventual problems
with the acquirers (Macsim, 2012). The knowledge of the legal ground where
producers or traders have activities is one of the most important cells in producers’
extended businesses.
Antecedents of consumers’ behavior
Companies provide customers with information about their products on their official
websites and this entails an information flow and a way to promote themselves
through forums, chat rooms, personal blogs and other social sites (Reed et al., 2001).
The communication endeavors are part of sharing knowledge about the technical and
economic aspects of consumers’ area (Dinu et al., 2010). The capacity brought about by
the online environment for allowing people to be content-creators reveals a more
optimistic bond among customers and between customers and traders (Crișan &
Zbuchea, 2015; Novak et al., 2000).
The type of message, the medium, and the frequency of advertising are key marks for
touching a level of attention which is indicative of persuading clients (Johnson, Pham &
Johar, 2007). In this light, Novak, Hoffman, and Yung (2000) described the online flow
as engendering a state of mind which makes the individual deeply involved in the
online activity. The greater the flow, the more the exploratory behavior grows.
Furthermore, searching more information about a product in the online medium is
more connected to skills and control (Novak et al., 2000) and less to a well-formed
searching attitude of the consumer.
The adoption and diffusion of information are strictly related to the degree of interest
towards certain goods; the individualism is responsible for being more receptive or
having an avoidance behavior (De Mooij & Hofstede, 2011, p.189). In this context,
already formed behaviors are modified by means of new communication technologies,
disclosing new ways of working and bonding (Reed et al., 2012). The quality of
gathered information is strongly related to the sources’ relevance for a certain field.
The provided information comes from internal and external sources: knowledge,
experience, and interpersonal communications or public communications (Milner &
Rosenstreich, 2013).
Searches, conducted online by individuals, represent a predictor for their future
collective behavior: economic, political or cultural interests reveal themselves through
the objects that are searched online by users (Goel et al., 2010). Affiliations and
affinities are also determined through the number of entrances to study promotions,
locations, parties, real estate prices and so on (Goel et al., 2010). Online search systems
estimate people’s needs and interests and all together, have the ability to delineate
traders’ and producers’ expectations. Citizens’ expectations and buying experiences
are correlated with the main outcome derived from the quality of communication, of
the product and pricing structure (Isabella, Pozzani, Chen & Gomes, 2012). The state of
relaxation that characterizes the consumer in a certain moment is an influential factor
on modifying his judgments and not thinking of the consequences of buying, in the long
run (Johnson et al., 2007).
364 Strategica 2016
Prior assertions posit that more knowledge about customers amounts to a better
marketing strategy and better interaction with consumers (Novak et al., 2000).
Communicating synchronously with customers through online forums or e-messenger
enhances the power of adapting to clients’ needs and understanding of improvements
that are to be made in order to succeed in business.
Focusing on choosing services, Sharma (2014) contended that the process of making
decisions defines the buying behavior. Usually, people are led by beliefs when they
make a decision to buy a product. Even though, cognitive dissonance interferes when
the same person has “conflicting beliefs” (Sharma, 2014, p.833) which create a gap
between initial beliefs and adopted behaviors.
Milner and Rosenstreich (2013) insisted on the idea that events with the capacity to
change consumer’s lifestyle or conduct represent instigators of the process of decision-
making. The buying behavior involves four types of behaviors: limited decision
making, extensive decision, programmed behavior and impulse behavior (Sharma,
2014, p.836).
Concentrating on behavior, Cachon and Swinney (2009) highlighted that intrinsic
characteristics of consumers are notable for the decision-making process (buying or
not). The firm can deploy an evaluation in the selling season, not only after its
completion, in order to know what prices to establish and what strategy to embrace for
augmenting their profit and for gaining more customers. The interesting point in no-
purchase is the feedback of the potential consumer and the reasons that made him
renounce to buying a product. Cognitive dissonance is to be expanded to the status of
non-buying and not to remain to the stadium of examining failure after buying a
product which does not correspond to expectations (Milner & Rosenstreich, 2013).
The dimension of purchase is affected by consumers’ congruence perceptions, the
bond between a company and a consumer being enhanced by the preferences that the
consumer has for certain brands (Sen & Bhattacharya, 2001, p.238). Sharma (2014)
considered that the psychological tension created between divergent beliefs is left
aside by bringing to a close inconsistency, through choosing the most supported belief.
Lately, the most studied consumer’s behavior is the strategic behavior, which has a
double impact: on the company and on consumers. The explanation relies on the
manners according to which the company tries to contain this behavior and the way
consumers react to the company’s changes, actions derived from trade operations
(Aflaki, Feldman & Swinney, 2015). As stressed by De Mooij and Hofstede (2011),
every culture has its own configuration, and certainty in covering a market domain
relies on producer’s position towards citizens, who are potential buyers. This can be
managed only by understanding people’s variations (De Mooij& Hofstede, 2011) that
make them decide how to act and in what context.
Consumers’ orders are often related to the possibility that they have to collect
information about products and, at the same time, to the availability of a product when
they are not able to order something that is not found on the market (Kaufmann, Ali
Khan Panni & Orphanidou, 2012).
The social background influences consumer’s decision purchase and aspects as
information comprehension, resources, and individual predispositions are
Modelling and Prediction in Marketing and Management 365
fundamental to be acknowledged by the trader in order to offer specialized attention
to the potential buyer (Bray, 2008; Isabella et al., 2012; Milner & Rosenstreich, 2013;
Zbuchea, 2013). Other parties’ recommendation is, among additional internal and
external factors, one of the elements of the purchase process, leading to an extensive
examination of the product; every buyer processes information in a different way
(Huang, Lurie & Mitra, 2009).
Behavioral processes are a mirror of individual’s attributes and mind processes. The
social context can’t be separated from the individual, so a person is integrated finally in
a societal ground which denotes collectivistic models (De Mooij & Hofstede, 2011;
Reed et al., 2012). The mentioned authors sustain that the same brand receives
different labels by citizens who are part of different cultures. The challenge for a
company is to study people and to be prepared to fulfill their needs as for gaining
national market arenas and, eventually, European and international markets.
Methodology
The study seeks to generate detailed and in-depth descriptions of participants’
experiences, being grounded in a qualitative approach based on phenomenological
interviews. The interviewees’ observations, perceptions, and understandings were
investigated by employing a semi-structured in-depth interview. This option catalyzed
the opportunity to discuss some topics in a more detailed manner and the descriptions
were further explored through ‘probes’. We considered individual interviews more
valuable to provide detailed information about the meaning of the situations and of
social contexts to each participant in the setting. Twelve online consumers (aged
between 20 and 32) of online products were selected using a snowball sampling.
The interviews comprised 13 main questions (supported by additional clarifications)
and were conducted during April and May 2016. Questions were posed in a relaxed
manner so that the interview appeared more like a discussion. The purpose of the
interview was explained to the respondents and they were encouraged to cooperate.
Still, they were not given too much detail that would have biased their responses.
The structure of the interview followed Seidman’s (1998) three-phase qualitative
interview: focused life history (the respondents’ experiences were put in context, by
asking them to provide as much information as possible about themselves,
concentrated on the topic of the study); details of experience (concrete details of their
present experience in the research topic area); reflection on the meaning (reflection on
the meaning of their experience, how they make intellectual and emotional
connections with the experiences that are the subject of the research topic). The
answers to the interviews were categorized by carrying out a thematic analysis as a
systematic way of identifying all the main concepts which arose in the interviews and
of developing them into common themes.
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Discussion
The majority of the respondents admit that they trust European brands and that they
feel confident in using e-commerce thanks to European protective legislation. Only one
respondent (P.C., legal advisor, 26 y.o.) deemed that “not all traders respect rules
imposed by the European Union and I can provide an example from my own experience: I
ordered online a dress and when I wanted to return it because it did not fit me, I had
problems in receiving my money back, although I respected the legal period of 14 days for
withdrawal”.
Most of the interviewees acknowledge the importance of examining European
legislation about the consumer’s protection, but even if their mind is set on reading
rules and being informed, they invoke two reasons for not acting this way: the lack of
proper time for searching online legislation and the national institutions’ disinterest in
communicating about e-commerce and being receptive to consumers’ questions. Out of
the 12 interviewees, two gave voice to a separate opinion, assuming a more searchable
conduct only if they moved to another European country and with a desire to be more
prepared than others in the legislative commerce ground.
When being asked about their attitudes towards informing themselves about rights
and obligations that are usually described on traders’ sites, all the respondents admit
that they have a trustful attitude and that they read this special sections after they are
not satisfied with the product and they want to exercise their right of withdrawal – “It
sounds strange that I, as a legal advisor, do not attach importance to the legal section,
but my motives are simple: usually, I feel pretty confident of vendors and secondly, I know
the European rules regarding consumer protection”.
As far as the knowledge of consumer information is concerned, almost all our
interviewees asserted that consumers’ associations seem to be the most informed and
willing to share information about ensuring good practices and legislation compliance.
They do not perceive national institutions as prepared enough to support consumers’
informative area and to solve their problems derived from online orders.
Bringing forward the problem of communicating about e-commerce specificity and of
feeling confident and informed as a European consumer, the respondents advanced
opposite views, being separated into two groups: 7 out of 12 answered that they do not
always feel confident and that they would like a more fact-based approach between
public institutions and consumers and, the other part, consisting of 5 respondents
declared they feel informed thanks to online communication which provides a lot of
useful information, official and informal, as well.
Interviewees have systematically shown, through the given examples, that they
appreciate more the European policies about consumers’ protection, but, at the same
time, they perceive national laws about commerce more useful and easier to interpret.
An interesting answer was given by A.L. (economist, 31 y.o.), who stated that “national
laws create stability and uniformity in application and furthermore, for consumers is
easier to contact national institutions than the European ones. I doubt European policies
are applied sequentially in all member states”.
Modelling and Prediction in Marketing and Management 367
Some answers brought evidence that consumers are influenced in their decision-
making process on acquisition not only by external factors (social affiliation, work
finicality or social affinities) but also by internal factors specific to every individual
(brand addiction, strategic buying, vacuous ordering, emotional orders).
In the end, discussing consumers’ trust in the information procured from traders,
almost all the interviewees expressed caution about product’s quality and reporting it
to price. Regardless of traders’ information, consumers make attempts in looking for
online forums and other acquaintances’ advice before acquiring a product online. They
are more secure in their acquisition and they insist, however, that the final decision
belongs to them. It is worthy of notice that our interviewees mark the essential of
online collaborative and informative dynamics.
Conclusions
Total harmonization of European laws does not guarantee an identical application in
all member states because of the different cultures, procedures, judicial systems and
environments. The harmonization of EU legislation on consumers’ rights puts an end to
legal fragmentation and makes e-commerce easier to adopt by consumers as well as by
traders (Macsim, 2012).
Consumer’s behavior is undoubtedly an influential factor on product’s management
and on its characteristics (Cachon & Swinney, 2009). The purchasing behavior is
different in every country and studies support firms’ strategies to foster a safer and
more dynamic marketplace. Moreover, the purchasing behavior describes consumers’
needs, attitudes, and motives while consumers’ choices stand for an intricate process
reflecting psychological and environmental factors. Past behavior, individual control,
intentions, expectations and normative beliefs are stages that, to a certain degree,
inflame consumer’s motivations in buying a product or renouncing at the idea of
buying it (Bray, 2008). Online communication enhances products’ exposure and
contributes to a higher level of safe acquisitions thanks to transparency and
communication complexity (Isabella et al., 2012, p.670).
Assuming all these facts, as a future direction, we intend to further investigate the
national institutions’ implication in improving the application of consumers’ legislation
within the European space and in cultivating a reasonable and solid trust between
parties.
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370 Strategica 2016
TOURISM BEHAVIOR OF YOUNG PEOPLE. A COMPARATIVE
PERSPECTIVE USING DIFFERENT FACTOR ANALYSES METHODS
Oana ȚUGULEA
”Alexandru Ioan Cuza” University of Iași
22 Carol I Blvd., 700505 Iași, Romania
ciobanu.oana@uaic.ro
Claudia BOBÂLCĂ
”Alexandru Ioan Cuza” University of Iași
22 Carol I Blvd., 700505 Iași, Romania
iuliana.bobalca@uaic.ro
Liviu-George MAHA
”Alexandru Ioan Cuza” University of Iași
22 Carol I Blvd., 700505 Iași, Romania
mlg@uaic.ro
Abstract. The purpose of this study is to investigate results obtained using different
statistical procedures for the case of young people’s touristic behavior. Our aim is to
understand if different statistical procedures deliver different results when young tourists
use the Internet vs. the travel agency in planning a trip. The objectives of this research
are: (1) Identifying the main factors that group important aspects when young tourists
use the services of an agency to plan a trip, using the common factors method; (2)
Comparison of results of the common factors method results with principal components
method results, when young tourists use the services of an agency to plan a trip; (3)
Identifying the main factors that group important aspects when young tourists use the
Internet to plan a trip, using the common factors method; (4) Comparison of results of
the common factors method results with principal components method results, aspects
when young tourists use the Internet to plan a trip. A quantitative survey was conducted
on a sample of 217 young tourists. Two types of statistical procedures were used to
compare the results: Principal Component Method and Principal Axis Factoring Method.
The research results indicated that Lack of flexibility, Costs saving, Professionalism and
Received help are factors used when young tourist use the services of an agency to plan a
trip. Comfort ability, Insecurity, and Lack of trust are among the factors when young
tourists use the Internet to plan a trip. The study suggests that the Principal Axis
Factoring Method is delivering slightly more logical grouped items but the total variance
of the scales is smaller comparing to the total variance of the scales delivered by the
Principal Component Method. This work is original because we identify scales to measure
the importance of using travel agencies and the Internet in planning trips using two
different factor analyses.
Keywords: travel agencies; tourism; Internet; factor analyses; scale.
Modelling and Prediction in Marketing and Management 371
Introduction
The importance of the Internet for the tourism industry has rapidly increased in the
recent years. The Internet is an important channel both for communication and
distribution (Law, Leung & Wong, 2004), not just because it offers consumers the
opportunity to buy products and services using electronic channels, but also because
of its wide use as an information environment (Turban, Lee, King & Chung, 2000).
Understanding tourist’s behavior in planning a vacation is key information both for the
providers of touristic products and tourism authorities in developing appropriate
marketing strategies. Some people are more confident using the Internet for searching
information and booking while others choose to contact travel agencies, to discuss
with travel agents and buy from them. It is necessary to discover the factors
influencing the use of the Internet or the travel agencies for planning trips.
The purpose of the present research is to explore different results using two different
statistical procedures for the case of young people’s touristic behavior in planning a
trip. We investigated if different statistical procedures deliver different results when
analyzing young tourists’ choice to use the Internet vs. the travel agency in planning a
trip.
Using Internet and travel agencies in planning a trip
The Internet is now a unique and sustainable online business environment available
for information gathering and selling, both for tourists and companies. The use of the
Internet influences tourists’ decisions regarding the intention to travel (Kaplanidou &
Vogt, 2006). Internet information affects “all stages of the tourist’s information
process” (Lohmann & Schmücker, 2009, p.32).
There is a large interest in studying important factors affecting the use of the Internet
in planning a trip. Three important characteristics of online travel purchases were
identified in the study of Weber and Roehl (1999, p. 296): „security of sensitive
information”, „quality of information about purchase choices” and „Internet vendor’s
reliability”.
The main reasons for using the Internet for travel planning are a convenience, time
saving (Weiner & Brown, 1995; Heung, 2003), accessibility, real-time updated
information (Bonn, Furr & Susskind, 1999), the interest in using new technology and
service quality (Heung, 2003). The study of Law, Leung, and Wong (2004) identified
convenience (for searching and purchasing) as an advantage of the Internet. Ease of
use is a significant factor for tourists when they decide to access the Internet for
planning a trip (Castañeda, Frías & Rodríguez, 2009, p. 549). Also, one of the main
reasons for not using the Internet for information or booking is the insecurity (Sterne,
1999; Heung, 2003, p.375).
Different nationalities require different sources of information (Kozak, 2007).
Travelers have different information needs from the Internet at different stages of
their trip. Before the departure, the travel planning process is affected by the
availability of information because tourists usually seek feedback on the forums or
372 Strategica 2016
specialized websites about the products they have selected (Kim, Lehto & Morrison,
2007, p.160).
Researchers also investigated different market segments behavior on Internet users
for travel planning. Kim, Xiang, and Fesenmaier (2015, p.277) examine different issues
of Internet use among four generational groups: Silent Generation, Baby Boomers,
Generation X and Generation Y. They discovered significant differences between these
generations regarding information search process, trip planning activities and online
booking behavior. The study of Chang (2014) identified four groups of Internet travel
planners: sensate, defensive, deal and totemic.
Despite the fact that online services provide tourists a particular comfort in finding
information and purchasing products and services, many customers still prefer to use
traditional purchasing alternatives, such as travel agencies. Vasudavan and Standing
(1999, p.216) mention three roles of the travel agencies, concerning: providing
information, processing transactions and tourists counseling.
There are cases when people use the Internet only for information purposes, after
which they will contact the traditional channels to make the reservation and to buy the
touristic products. Some of the benefits provided by travel agencies, comparing to the
Internet are the possibilities to offer personal information and specialized advice
(Palmer & McCole, 1999). Almost similar results are revealed in the study of Law,
Leung and Wong (2004, p.102) that identified human touch and personal services as
main benefits of travel agencies. The same research compared the perception of two
different travelers groups: short-haul and long-haul. Long-haul tourists have the habit
of buying more from the Internet travel websites than the others. Short-haul tourists
consider that online travel agencies are more flexible than travel agents.
Although there are travel consultants who don’t believe that the development of travel
booking through the Internet will cause potential loss of customers (Vasudavan &
Standing, 1999), the best approach for a travel agency is to sustain its advantages by its
presence in the online environment, rather than being just a traditional booking
option.
Purpose and hypotheses
The purpose of this study is to investigate different results using different statistical
procedures for the case of young people’s touristic behavior. Our aim is to understand
if different statistical procedures deliver different results when young tourists use the
Internet vs. the travel agency in planning a trip.
The objectives of this research are:
Objective 1: Identifying the main factors that group important aspects when young
tourists use the services of an agency to plan a trip, using the common factors method;
Objective 2: Comparison of results of the common factors method results with principal
components method results when young tourists use the services of an agency to plan a
trip;
Objective 3: Identifying the main factors that group important aspects when young
tourists use the Internet to plan a trip, using the common factors method;
Modelling and Prediction in Marketing and Management 373
Objective 4: Comparison of results of the common factors method results with principal
components method results when young tourists use the Internet to plan a trip.
Derived from these objectives and past research, the research hypotheses are:
H1: Lack of flexibility, Saving of costs, Professionalism and Received help are factors used
when young tourists use the services of an agency to plan a trip;
The four dimensions were identified in a previous quantitative research (Bobâlcă,
Țugulea, Maha & Maha, 2014), using the Principal Component Analysis (PCA). It is
expected to identify them in a Common Factor Analysis as well.
The Received help dimension, in particular, is expected to be identified due to a
previous qualitative research and past studies. The results of the three focus groups we
organized show that young people who plan a trip consider that a travel agency
presents the advantage of working with people trained to offer specialized
information, recommendations, and advice based on reasons. Also, the study Servicing
the Digital Leisure Traveller conducted by Travelport - a leading distribution service
and e-commerce provider for the global travel industry -underlines the fact that, in
planning a more complex trip, the young generation usually asks for help from travel
agents.
H2: Comfort ability, Insecurity, and Lack of trust are among the factors when a young
tourist uses the Internet to plan a trip
In the previous quantitative research, the PCA identified these three dimensions
(Bobâlcă et al., 2014). The Lack of trust dimension was also suggested from the
previous qualitative research that revealed that the lack of human factor on Internet is
a reason not to trust the Internet, and past research, such as Lewis and Semejin (1998),
that explain that trust is an important aspect for people who plan a trip. The lack of
trust can be found on "credit card's security" and "confidentiality problems" (Weber &
Roehl, 1999).
Methodology
The hypothesis and the questionnaire used in the present study were built based on a
previous qualitative research that investigated young people’s motivations, opinions
and behavior as tourists. The questionnaire was tested on 30 subjects. The final
quantitative research was conducted on 217 valid questionnaires.
Population and sample
We paid attention to the ethical aspects of the research during the process of data
collecting. The study is based on the answers of the students questioned about their
tourism behavior. We considered that students, men, and women, attending all the
education levels (bachelor, master, and doctoral studies), are representative of the
population studied (young people). The teachers’ permission was needed in order to
collect data. Students’ current activity was not disturbed. Data collection was not an
evaluation criterion. Students were informed about the research. The verbal consent
was asked. Students had the option to quit anytime during the data collection. Aspects
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of personal life that could lead into an uncomfortable situation for them were not
approached by the questionnaire.
The investigated population, considered representative of young people with a high
level of education (Enis, Cox & Stafford, 1972), consists of bachelor’s degree students,
master’s degree students, and Ph.D. students. Students are frequently used in order to
understand behavioral research (James & Sonner, 2001; Oakes, 1972).
Out of the 217 investigated students, 55.5% are female students and 44.5% are male
students, 44% are in the first year of study, 35.4% are in the second year and 20.6%
are in the third year, 73.2% have the bachelor’s degree, 24.4% are master students and
2.4% are Ph.D. Students.
Research results
Objective 1. Identifying the main factors that group important aspects when young
tourists use the services of an agency to plan a trip, using the common factors method.
In order to evaluate the importance of aspects referring to a travel agency, the 5 points
scale (1- Not at all important; 2 – Not important; 3 – Neutral; 4 – Important; 5 – Very
important) was used. The 24 aspects listed in the questionnaire were selected from the
previous qualitative research.
We conducted factor analysis, Principal Axis Factoring Method (PAF), in order to find
the determinants of using the services of an agency using a Common Factor Method.
Respondents that used at least once the services of a travel agency were selected, as
their answers were considered to be relevant. 5 factors were identified in the first run
of the analysis. As there were items with similar loadings in Pattern Matrix, successive
runs of the analysis were conducted until the items in Factor Matrix were loaded > 0.3
and items in Pattern Matrix were not loaded similarly between two or more factors.
The eliminated items in these successive analysis were: You get more information from
the agency staff than using other sources; Agency deals are not promoted very well; You
can benefit from a customized travel package; The agency has a good reputation; You
don’t get degree of liberty; You can get discounts if you are a loyal customer; You do not
have liberty regarding travel schedule; It allows online payment of the tourist product.
The final analysis delivered four factors explaining 52% of the total variance. Items
were grouped in a logical manner. A scale is reliable when the lower limit of the
Cronbach-alpha coefficient is between 0.7 and 0.9 (Garson, 2010). Some researchers
accept lower limits such as 0.5 (Fogg, 2001). The rule of reliability is (George &
Mallery, 2003): 0.9 – excellent reliability; > 0.8 – good reliability; > 0.7 – acceptable
reliability; > 0.6 – doubtful reliability; > 0.5 – weak reliability; < 0.5 – unacceptable.
This indicates the scale has a good reliability. The internal consistency of the entire
scale measured with Cronbach-alpha is 0.842.
Table 1 represents the resulted dimensions and the items grouped in each dimension.
Modelling and Prediction in Marketing and Management 375
Table 1. Dimensions of important aspects in reference to a travel agency – PAF
Method
Lack of flexibility Saving of costs Professionalism Received help
(money, time, effort)
You depend on the My effort is reduced They present It helps you
agency's work schedule (the agency organizes several offers to decide if you have
all) choose from not decided
Their prices are high
Time saving (the You can benefit The specialized
If you cancel your trip, whole journey is from a guide staff clarifies your
you pay penalties planned from the uncertainties
beginning) Discuss with
You do not get degree of specialized The travel agency
freedom You can negotiate the personnel in offers you a
price of the touristic tourism package with
Not all information package tight schedule
provided correspond to
the reality You receive
recommendations
You don’t know how are about what you
the people that you will need to know
go on the trip with (for
group tours)
Distrust of the travel
agency
Each of the 5 dimensions was analyzed from the reliability and total variance explained
points of view.
Lack of flexibility
The internal consistency of the scale is 0.840, which indicates a scale of a good
reliability. The dimension consists of 7 items and explains 28% of the total variance.
All the investigated aspects are considered moderately important (mean between 3
and 4).
Saving of costs (money, time, effort)
The internal consistency of the scale is 0.771, which indicates a scale of an acceptable
reliability. The dimension consists of 3 items and explains approximately 3.65% of the
total variance.
All the investigated aspects are considered important (mean approximate 4). The most
important advantage offered by a travel agency is time saving.
Professionalism
The internal consistency of the scale is 0.805, which indicates a scale of a good
reliability. The dimension consists of 3 items and explains approximately 15% of the
total variance.
The investigated items are all important (mean around value 4). The most important
item is “They present several offers to choose from”.
376 Strategica 2016
Received help
The internal consistency of the scale is 0.746, which indicates a scale of an acceptable
reliability. The dimension consists of 4 items and explains approximately 5.45% of the
total variance. All aspects are moderately important (mean between 3 and 4).
Objective 2. Comparison of results of the common factors method results with principal
components method results when young tourists use the services of an agency to plan a
trip
In a previous quantitative research (Bobâlcă et al., 2014), factor analysis was
conducted on the same database. The only difference was that the analysis was the
PCA, Varimax rotation.
Table 2 represents differences between the two types of factor analysis from the point
of view of the number of items, the differences in items composing the dimensions and
the total variance explained.
Table 2. Differences in results between the two methods – PCA and PAF (Bobâlcă et
al., 2014)
Type of Dimensions/ Total
Factor number of variance Extra items Items missing
analysis items explained
Principle Lack of 31% You do not have You do not know how
Compone flexibility/7 liberty regarding are the people that
nt items travel schedule you will go on the trip
Method with (for group tours);
Saving of costs/5 16% You can benefit -
Total items from a customized
variance travel package
entire
scale: You can get
65% discounts if you are
a loyal customer
Professionalism/ 7% - -
3 items
Received help/ 4 5,5% - -
items
Online payment/ 5% It allows online -
1 item payment of the
tourist product
Principle Lack of 28% You do not know You do not have
Axis flexibility/7 how are the people liberty regarding
Factoring items that you will go on travel schedule
the trip (for group
Total tours);
variance Saving of costs/3 3.65% - You can benefit from
entire items a customized travel
scale: package
52% You can get
discounts if you are a
loyal customer
Professionalism/ 15% - -
3 items
Received help/ 4 5.45% - -
items
Modelling and Prediction in Marketing and Management 377
One important difference between the results delivered by the two types of factor
analysis is the total variance explained by the entire scale. The variance explained by
the PAF Method is 13% lower than the variance explained using the PCA Method. For
all the other aspects, there are small, not important differences. Also, there are slight
differences between the scales from the items point of view. All these aspects are
highlighted in the table above.
Objective 3. Identifying the main factors that group important aspects when young
tourists use the Internet to plan a trip, using the common factors method
In order to evaluate the importance of aspects referring to a travel agency, the same 5
points scale (1- Not at all important; 2 – Not important; 3 – Neutral; 4 – Important; 5 –
Very important) was used. The 26 aspects listed in the questionnaire were selected
from the previous qualitative research.
As in the previous case, we conducted factor analysis, PAF Method, in order to
understand the determinants of using the Internet to plan a trip, using a Common
Factor Method. Respondents that used at least once the Internet to plan a trip were
selected, as their answers were considered to be relevant. 4 factors were identified in
the first run of the analysis. All items loaded > 0.3 in Factor Matrix.
The eliminated items in the successive analysis, items that loaded similar between two
or more factors in Pattern Matrix, were: Opinions published on the Internet of other
people are not always real, It allows you to plan your trip as you wish (more freedom).
The final analysis delivered three factors explaining 50.78% of the total variance. Items
were grouped in a logical manner. The internal consistency of the final scale, measured
with Cronbach -alpha is 0.886.
Table 3 shows the manner the items were grouped into factors.
Table 3. Dimensions of important aspects in reference to the Internet – PAF Method
Comfort ability Insecurity Lack of trust
You can easily compare offers Confidentiality of the Pictures,
information provided is illustrations may
No time limit for seeking information not be fake
(you can surf the Internet as much as assured/controllable
you want) Information may
Lack of possibility to be false
Not necessary to go at the firm evaluate the quality or
headquarters the existence of Do not see who
products / services you are talking to
You can access the information from any
location with Internet access Requires time to inform Not all
yourself information is
Costs less than if you go to a travel updated
agency Transaction security is
not guaranteed
You can view pictures or videos with the (insecurity of the credit
selected destination card)
You can quietly take a buying decision, You cannot always ask a
without being pressured by a company specialized staff
378 Strategica 2016
employee
Is uncertain because of
It is available non-stop viruses and/or hackers
You can postpone a journey without Booking on the Internet
paying penalties is not always reliable
You can find opinions from other people
(reviews)
Provides more information
It provides information to contact the
hotel/guesthouse/location where you
want to check in
It's easy to find what you want
We analyze each dimension.
Comfort ability
The internal consistency of the scale is 0.914. The scale has an excellent reliability. The
dimension consists of 13 items. The factor explains 27.64% of the total variance.
All the investigated aspects are important and very important (all averages are above
4) for young tourists. This suggests that aspects connected to comfort, such as no
limited time when they use the Internet, removing the space barrier and receiving
more information should be considered by companies promoting their touristic
products using the Internet.
Insecurity
The internal consistency of the scale is 0.883. The scale has a good reliability. The 7
items composing the scale explain 19.40% of the total variance.
All the investigated aspects are between neutral and important from the young
tourists’ point of view (mean between 3 and 4).
Lack of trust
The internal consistency of the scale is 0.778. The scale has an acceptable reliability, as
the value is almost 0.8. The dimension consists of 4 items. The factor explains 3.72% of
the total variance. All the aspects are considered to be between neutral and important
(mean between 3 and 4).
Objective 4. Comparison of results of the common factors method results with principal
components method results when young tourists use the Internet to plan a trip.
As it was already explained in objective 2, in a previous quantitative research (Bobâlcă
et al., 2014), factor analysis was conducted on the same database, with the difference
that the analysis was the PCA, Varimax rotation Method.
Table 4 represents differences between the two types of factor analyses.
Modelling and Prediction in Marketing and Management 379
Table 4. Differences in results between the two methods – PCA and PAF
(Bobâlcă et al., 2014)
Type of Dimensions/nu Total Extra items Items missing
Factor mber of items variance
analysis explained
Principle Comfort 31% It allows you to Costs less than if you go
Component ability/13 items plan your trip to a travel agency
Method as you wish
(more
Total variance freedom)
entire scale: Insecurity/7 21% - -
57% items
You can get
discounts if
you are a loyal
customer
Lack of trust/ 3 5% - Not all information is
items updated
Principle Axis Comfort 27.64% Costs less than It allows you to plan
Factoring ability/13 items if you go to a your trip as you wish
travel agency (more freedom)
Total variance Insecurity/7 19.40% - -
entire scale: items
50.78% Lack of trust/ 4 3.73% Not all -
items information is
updated
The variance explained by the PAF Method is almost 7% lower than the variance
explained using the PCA Method. For all the other aspects, there are small, not
important differences. All these aspects are highlighted in the table above.
Conclusions and implications
The research has the purpose of investigating differences in results concerning young
people's touristic behavior towards how they use the Internet vs. the tourism agency
when they plan a trip. The differences consider using two different factor analyses on
the same database, for the same objectives. The analyses used are PAF and PCA
Methods. The objectives considered identifying dimensions of important aspects
perceived by young tourists when planning a trip for two situations: using the services
of an agency and using the information placed on the Internet.
The dimensions resulted from the PAF Method are mostly the same as the dimensions
resulted from the PCA method. Small differences were identified concerning the total
variance explained by the entire scale and by each factor. Also, for the case of aspects
considered when using the services of an agency, a dimension with one item identified
with the PCA Method was not identified at all with the PAF Method. Concerning the
composition of items of each dimension, there are also small differences.
The study suggests that the PAF is delivering slightly more logical grouped items but
the total variance of the scales is smaller comparing to the total variance of the scales
delivered by the PCA Method. If the purpose of a study is to explain as much as possible
380 Strategica 2016
from the total variance, PCA Method is recommended. On the other hand, if the
purpose of the study is to underline factor structures in a very logical manner, PAF
Method is recommended.
Confirmation and disconfirmation of research hypotheses
H1: Lack of flexibility, Saving of costs, Professionalism and Received help are factors used
when young tourist use the services of an agency to plan a trip – the hypothesis was
confirmed.
Both factor analyses presented in this study identified these four dimensions. H1 is
confirmed.
H2: Comfort ability, Insecurity, and Lack of trust are among the factors when a young
tourist uses the Internet to plan a trip – the hypothesis was confirmed.
Both factor analyses presented in this study identified these three dimensions. H2 is
confirmed.
Research implications
This research aimed to investigate possible different results when using two different
factor analyses to analyze young tourists’ behavior in planning a trip when using the
Internet and travel agencies as sources of information and tools.
This work is original because we identify scales to measure the importance of using
travel agencies and the Internet in planning trips using two different factor analyses
and factor rotation methods.
Managerial implications
From the resulted scales point of view, these results are useful for travel agency
managers and Internet websites administrators. The scales were underlined by two
different factor analyses.
Limitations of the research
One important limitation of this study is the sample’s consistency, as only students
were investigated. Students are very familiar with using the Internet. More conclusive
results could be obtained if young people that are not students are investigated as well.
Future research
A future direction could be to confirm the dimensions in a future study, using
confirmatory factor analysis. This aspect is available only for the dimensions resulted
from the Principal Axis Factoring Method. Confirmatory factor analysis is
recommended when a common factor method was used in the exploratory phase.
Modelling and Prediction in Marketing and Management 381
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Modelling and Prediction in Marketing and Management 383
LINKING ENTREPRENEURIAL ORIENTATION TO FIRM
PERFORMANCE IN A POST-SOCIALIST MARKET CONTEXT: THE
CASE OF HUNGARY
David KOVACS
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
kovacsdavid009@gmail.com
Taylan ÜRKMEZ
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
uerkmez@wirtschaft.uni-kassel.de
Dominik BROCKHAUS
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
brockhaus@wirtschaft.uni-kassel.de
Ralf WAGNER
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
rwagner@wirtschaft.uni-kassel.de
Katrin ZULAUF
University of Kassel
1 Moenchebergstr St., Kassel, 34125, Germany
zulauf@wirtschaft.uni-kassel.de
Abstract. Entrepreneurial orientation provoked the interest of numerous scholars as well
as political and administrative decision-makers. Both start-ups and already established
corporate entities are increasingly persecuting new opportunities, products, and business
models in order to establish superiority above their competitive environment. The
tendencies evince an optimist impact of entrepreneurial orientation on business
performance, namely on financial performance. Beyond the aforementioned relationship,
there are impulses such as environmental and organizational factors, which are affecting
the businesses. The results of this study provide evidence of the effect of entrepreneurial
orientation on business performance in a post-socialist context. We test the impact of
three moderators on this bivariate relationship. In contrast to the substantial body of
literature for Western markets, we contribute to minimizing the considerable gap of
research in post-socialist economies. Entrepreneurial orientation as an organizational
behavior may affect the financial performance of businesses differently in distinct market
contexts. Both, internal and external factors are crucial to identifying, analyze and
monitor, to achieve superior performance and to overcome competitors. This study builds
upon a stratified sampling survey of Hungarian company owners and managers from the
Amadeus database. The study uses a confirmatory, deductive approach. For the analysis,
384 Strategica 2016
we rely on structural equation modeling using the PLS algorithm. Our study contributes
to existing literature by means of confirming the entrepreneurial orientation to firm
performance relationship for Hungary. In this context, we test the moderating effects of
environmental dynamism, environmental hostility as environmental factors and firm age
as an organizational factor. Environmental hostility is closely related to an unfavorable
environment, deriving from rapid and radical changes in the industry, which are typical
for post-soviet economies. In such dynamic environments, destructive innovations of the
industrial actors appear more often. The results confirm that the internal and external
factors have no significant influence on the entrepreneurial orientation to financial
performance relationship.
Keywords: entrepreneurial orientation; environmental dynamism; financial
performance; post-socialist economy.
Introduction
Entrepreneurship is essential to improve wealth and the economic welfare (Covin &
Slevin, 1986; Zulauf et al., 2015). A substantial body of Entrepreneurial Orientation
(EO) literature provides evidence that firms engaged with entrepreneurial guidance
outperform their more conservative competitors (Anderson et al., 2015).
Schumpeter’s gale of creative destruction commits entrepreneurs to explicit ongoing
phenomena in our global economy. The change makers with higher EO distinguish
themselves by a higher likelihood of grasping new opportunities, products, and
business models. A new entry in the market incorporates any innovative action
undertaken by an individual, strategic business unit or on a corporate level (Lumpkin
& Dess, 1996). Those actions are responsible for the constant changes and distortions
of existing market segments and open up new opportunities. EO redounds upon new
entries and venture boldness in a domestic and cross-national context (Schuster,
Falkenreck & Wagner, 2015), where innovativeness and risk-taking represent the core
of that action. Some scholars (i.e. Knight, 1997; Thomas & Mueller, 2000; Rauch et al.,
2009) indicate that dimensions of EO–independently from its dimensionality–may
vary across countries, thus through cultures. Consolidating the results of previous
research, we assume that an innovative ad-hoc managerial decision within a hostile
and turbulent business environment might attract stakeholder’s approval in a country
where uncertainty avoidance is low, such as Sweden, while in Japan it may get
punished and perceived as an absolute un-respectful and negative action.
Our main contribution is evaluating the impact of moderating context effects on the
relationship of EO and financial performance (FP) in Hungary. The remainder of the
study is structured as follows. First, we provide an overview of the relevant literature
of entrepreneurial orientation in transition economies. The following section describes
the research hypotheses development. The third section consists of the study design
and data description. Section four demonstrates the effects of entrepreneurial
orientation on firm performance. The final section concludes.
Modelling and Prediction in Marketing and Management 385
Entrepreneurial orientation in transition economies
A comprehensive literature review on EO leads to the result that post-socialist,
transforming economies attracted significantly less attention from scholars and
researchers in the past. There is an abundance of empirical evidence on EO in
developed economies and mature markets, such as the United States, while other
large-scale markets such as (Eastern) Europe, have remained partly unexplored
(Hermann, Alexander & Matthias, 2010). Ha-Brookshire (2009) noted entrepreneurs
“to play a significant role in firms’ competitiveness, revitalization, and superior
performance” not just in developed economies, but also in transitional economies
(p.131). In this vein, Marcotte (2011, p.194) argues that “the comparative assessment
of individual and organizational entrepreneurial activity may be more revealing than
the country rankings based solely on venture creation or business ownership. These
rankings have been notably used to monitor or predict the economic performance of
countries.” Analysts, policymakers and occasionally researchers have the tendency and
willingness to make entrepreneurial intensity equal to economic growth, as for
example the Commission of the European Communities (2004).
In their comparative study of strategic orientation’s impact on business growth,
Laukkanen et al. (2013) challenge the differences between Finland and Hungary. They
focus on the effect of earning orientation, EO, market orientation, and brand
orientation on business performance in an SME context. Complementing evidence by
Danis and Shipilov (2002) highlights entrepreneurial development in the context of
post-socialist economies comparing Hungary and Ukraine. The aforementioned and
other studies slightly have elaborated the field of entrepreneurship; however,
investigating the EO–performance relationship only in Hungary is still not addressed
by previous research.
According to the Global Entrepreneurship Monitor (Kelley, Singer & Herrington, 2015),
entrepreneurial activity in Hungary is lower than the economic level would indicate.
The study shows high standards of entrepreneurial intention, which may serve as a
catalyzer for entrepreneurship and corresponding economic activities. On the other
hand, Slevin and Terjesen (2011) found that there are differences in entrepreneurship
perception favorability of country populations, distinguishing between highly
favorable (e.g., Ireland and the United States) and less favorable (e.g., Hungary and
Japan). Hungary’s post-social, transitional market and the drawn up contradictions
among studies reveal that further research is needed in order to understand these
markets more deeply, and how the turbulent environment affects the entrepreneurial
actions.
Contextualization, constructs and research hypotheses
Adapting the contingency theory approach of Khandwalla (1977) and Venkatraman
(1989) we consider the contextual impact on the relationship of EO and FP to be
moderating variables. Figure 1 depicts the conceptual model of this study that builds
upon prior work of Lumpkin and Dess (1996).
386 Strategica 2016
Environmental
Factors
Entrepreneurial Financial
Orientation Performance
Organizational
Factor
Figure 1. Contextualization of the EO – FP relationship (modified from Lumpkin & Dess,
1996)
EO as a variable is divided into three predictors – innovativeness, risk-taking, and
proactiveness – according to Miller’s model (1983) composing a unidimensional
variable. Thus, we do not treat the three indicators as separate variables, but as a
conceptual entity. Two indicators, namely profitability and growth, capture the FP
variable. Indeed, according to its psychometric characteristics. Nonetheless, due to the
predictor duo, the construct identifies two dimensions, which are crucial to capturing a
more depth understanding of financial performance (Murphy, Trailer & Hill, 1996). We
adopt the scales for profitability from Venkatraman (1986). These include ‘return on
corporate investment’ and ‘return on investment relative to competitors’; however we
applied only the latter to avoid a posteriori item removal due to an overlapping nature.
The moderator variables are divided into two main groups: organizational or internal
factors, and environmental or external factors (Lumpkin & Dess, 1996). In this study
we consider one organizational factor; firm age (FA), and two environmental one;
namely environmental hostility (EH) and environmental dynamism (ED).
EH characterizes the external environment of organizations and is assessed by four
items – safety level of the external environment, investment opportunities, dominative
nature of the business environment, and the threatening degree of competitors’
actions. The wordings are adapted from Khandwalla (1977), with a minor modification
readjusted from Miller’s (1987) hostility scale.
Four items capture the ED in which the firms operate. The first addresses the external
environment from decreased growth opportunities to increment in those
opportunities. The second item scales the environment properties from diminution of
product/service technology to increment of those. The third item challenges the
environment on a scale starting from a high rate of innovation of processes and
products/ services to the low rate of those. The fourth item assesses the R&D rate from
high to low in the firm’s principal industry. All four indicators are adapted from
Miller’s (1987) environmental dynamism scale.
These indicators build a complex conceptual framework, where all the exogenous
variables and their influence can be acknowledged on the endogenous financial
performance outlined in Figure 2.
Modelling and Prediction in Marketing and Management 387
Figure 2. Conceptual model
The conceptual framework embraces only one direct causal relationship from EO to FP
(H1). The impact of the other exogenous constructs is assumed to moderate this causal
relationship (H2-H4). Our hypotheses follow the Bourgeois’ (1980) strategic
management literature distinction between content and process of entrepreneurship.
In the early stages, entrepreneurship was adequate with “going into business” and
“what kind of business shall we launch?” Alongside with the field development of
strategic management, emphasis reallocated to entrepreneurial processes embracing
risk-taking, experimenting with existing and future technologies and adopting
propensity to seize new opportunities (Bourgeois, 1980; Lumpkin & Dess, 1996). The
distinctive point between the two concepts is hidden in the decoupling of “what” from
“how” (Miller, 2011). Consequently, we define EO aligned to Miller’s (1983) and Covin
and Slevin’s (1991) standpoint as a marriage of firm level “entrepreneurial behavior
and managerial inclination at the strategic decision-making level, favoring actions with
uncertain outcome” (Anderson et al., 2015).
388 Strategica 2016
Table 1. Research hypotheses
Hypothesis Hypothesis Regression
Textual formulation
number dimension(s) analysis type
Firms with higher EO have a better
H1 EO Linear
performance than the ones with lower EO.
The dynamic environment has a positive
H2a Moderated moderating effect on the entrepreneurial
orientation-performance relationship.
EO, ED
The static environment has a negative
H2b Moderated moderating effect on the entrepreneurial
orientation-performance relationship.
The hostile environment has a positive
H3a Moderated moderating effect on the entrepreneurial
orientation-performance relationship.
EO, EH
The benign environment has a negative
H3b Moderated moderating effect on the entrepreneurial
orientation-performance relationship.
Higher firm age has a negative moderating
H4a Moderated effect on entrepreneurial orientation-
performance relationship.
EO, FA
Lower firm age has a positive moderating
H4b Moderated effect on entrepreneurial orientation-
performance relationship.
All research hypotheses are in line with prior research (Zahra & Covin, 1995; Wiklund
& Shepherd, 2005; Ha-Brookshire, 2009; Rauch et al., 2009; Miller, 2011; Anderson et.
al., 2015). In case the H1 will be rejected, the model would not fit the data. If H1 is
supported by the data, this model provides us with a suited foundation for testing the
contextual hypotheses H2-H4 of moderating effects of EO in the Hungarian economy.
Table 1 gives an overview of the research hypotheses.
Study design and data description
EO as a strategic behavior is measured on the organizational level, therefore from just
one answer per company is required to represent the organization. To investigate EO
of a business through top management is a typical and accepted approach (Covin &
Slevin, 1989). Literature suggests that subjective measures of performance can reflect
objective measures accurately, thus enhancing validity and reliability (Dess &
Robinson, 1984; Venkatraman & Ramanujam, 1986). Primarily owners and C-level
managers are targeted with the survey; however, the reachability of those people
might be cumbersome. Therefore, upper- and middle manager layers were involved in
the sample target to ensure a wider attainability and in order to maintain enough
responses.
A self-administrated online questionnaire covering 26 questions facilitates the data
gathering of this study. Pretesting feedback of 20 respondents supports an open-and-
shut completion procedure. Our stratified sampling builds upon the population of all
Hungarian companies independently from their size, revenue or any measurable
features. We spread the link to our online questionnaire among all Hungarian SMEs
listed in the Amadeus database. Company size by means of a number of employees
(assessed by means of full-time equivalents) serves as the control variable of the study
Modelling and Prediction in Marketing and Management 389
in order to create the stratified sample. We used the distinction between micro
enterprises (fewer than 10 persons employed), small enterprises (10 to 49 persons
employed), and medium-sized enterprises (50 to 249 persons employed). We
successfully invited 58 respondents. The majority (approximately 57%) were C-level
managers. 31% of the answers came from upper managers, while approximately 12%
of middle managers. Almost 88% of the responses come from the top or upper
managers providing high reliability of the answers.
Medium-sized companies with 41 (70.7%) in number dominate the sample. Small
(22.4%) and micro (6.9%) companies are the tails of the distribution matching the
distribution of company size of the population of the basic database. The most frequent
mentioned industries are agriculture, machinery engineering, wholesale & retail, food
& beverage and IT.
We use Cronbach’s alpha coefficient to assess the internal reliability (Hair et al., 2014).
Table 2 shows that the internal consistency of the scales meets the minimum required
threshold of .7.
Table 2. Internal consistency reliability
Name of the Variable Number of Items Cronbach’s Alpha
Entrepreneurial Orientation (EO) 9 .855
Financial Performance (FP) 6 .855
Environmental Hostility (EH) 4 .813
Environmental Dynamism (ED) 4 .719
Results
Using Smart PLS 3 (Ringle, Wende & Becker, 2015) for analysis, the results show that
EO has a positive effect on the financial performance of an organization. Please see the
appendix for the structural model (Figure 3) as well as the Heterotrait-Monotrait Ratio
(Table 4). Distinct regression analyses revealed that EO explains 23.5% of the variance
of the financial performance of organizations (β = .485, t-value = 4.56). With a p-value
of <.001 H1 is accepted.
Regarding hypothesis two to four, no significant moderating effects are found. The
moderate regression analysis reveals a correlation between the relation of ED and EO.
However, the analysis indicates that the used interaction term is neither significant nor
has a relevant beta coefficient. Significant moderation effect of EH on the linear model
of EO-FP cannot be observed. Lastly, the hypothesized moderating effect of the firm’s
age on the relationship of EO to FP could not be validated. Given this, we conclude that
the aforementioned hypotheses (H2-H4) must be rejected. The following Table 3 gives
an overview of the hypothesis test results.
Table 3. Summary of the hypotheses evaluation
Regression Hypothesis
Hypothesis Hypothesis
analysis Textual formulation accepted /
number dimension(s)
type rejected
Firms with higher EO have a better
H1 EO, FP Linear ACCEPTED
performance, than the ones with lower EO.
The dynamic environment has a positive
Moderated
H2a EO, ED, FP moderating effect on the entrepreneurial REJECTED
(multiple)
orientation-performance relationship.
390 Strategica 2016
The static environment has a negative
Moderated
H2b moderating effect on the entrepreneurial
(multiple)
orientation-performance relationship.
The hostile environment has a positive
Moderated
H3a moderating effect on the entrepreneurial
(multiple)
orientation-performance relationship.
EO, EH, FP REJECTED
The benign environment has a negative
Moderated
H3b moderating effect on the entrepreneurial
(multiple)
orientation-performance relationship.
Higher firm age has a negative moderating
Moderated
H4a effect on entrepreneurial orientation-
(multiple)
performance relationship.
EO, FA, FP REJECTED
Lower firm age has a positive moderating
Moderated
H4b effect on entrepreneurial orientation-
(multiple)
performance relationship.
Surprisingly environmental factors do not influence the relationship of EO and FP. In
the following section, we contextualize reasons for the specific case of Hungary.
Conclusion
The major contributions of this paper are first, testing the relationship of EO to FP in a
post-soviet economy. Behavior patterns in post-soviet transition economies
substantially depart from westernized strategic management. EO has become one of
the main topics in strategic entrepreneurship research (Anderson et al., 2015).
Second, we adapt established processes in contingency theory and relate the financial
performance to both causal facets of EO as well as the business environment by means
of EH and ED. The latter might carry risks, but at the same time may provide
opportunities for development and growth. Hypotheses of this study are anchored
around contingency theory due to the adaptation provoking nature of EO.
Third, we investigate EO as a strategic orientation on a business level and test how that
organizational behavior affects the financial performance. This allows the
measurement unit to determine EO as a macro-level phenomenon and to deliver a
more stable relationship with financial performance (Covin & Slevin, 1991). In this
study, EO covers as a unidimensional construct composed of risk-taking,
innovativeness, and pro-activeness excluding aggressiveness and autonomy. The
preeminent interest in entrepreneurship research derives from the global belief that it
has a stimulating impact on the development of economy and organizational entities.
Business performance provides the real test of any strategic pattern a firm might
employ, independently if the chronological interval of the research is longitudinal or
short-term. Literature suggests that there is a positive effect on FP coming from EO as
a firm-level behavior. However, dissimilar contextual factors are critical to take into
consideration. H1 is supported by the Hungarian data. Consequently, we confirm the
expectation that EO serves as a catalyst for financial performance of organizations in a
post-socialist context. This finding complements prior Western strategic management
knowledge (Covin & Slevin, 1991; Wiklund & Shepherd, 2005), and pushes out the
contextual reference. This extends the universal body of this type of studies.
However, this conceptual model might be too simple and would be easily obtainable by
organizations, thus the argument of Lumpkin and Dess (1996) is taken into account.
Modelling and Prediction in Marketing and Management 391
They argue that the impact of EO on performance is context-specific and therefore the
model should consider different factors originating from the inside or outside. The
dynamic nature of external and internal factors forces an unpredictable change in a
turbulent environment, which most of the time undermines the entrepreneurs’ ability
to envision the future (Lumpkin & Dess, 2001; Khandwalla, 1977). As a second
assessment of the external environment, hostility is the counterpart of munificence
and measures the degree of competition intensity and scarcity (Lumpkin & Dess, 2001;
Zahra & Covin, 1995). Notably, all hypotheses connected with ED or EH – H2a, H2b, H3a
and H3b – are rejected. The denial is surprising considering the development of the
Hungarian economy in the past decades. Although Hungary has transformed from a
centrally operated communist economy to a free capitalist market, the development
does not have a moderating effect on the EO-FP relationship. Further research is
necessary in order to document further changes and the turning point of this
development.
Fourth, to the best of the authors´ knowledge, firm age with its effect on the EO-FP
relationship has never been studied as an internal factor of organizations in Hungary
before. However, the linear structure of firm age is debatable. “An organization grows
more or less continuously, but its structure is changed only in discrete steps” as stated
by Mintzberg (1979, p.232). Therefore, the investigation of FA and its moderating
effect fulfills an unexplored gap inside strategic entrepreneurship research, and in
addition, it opens up new discussions such as its inclusion with other moderators or
variables. Despite the circumscribed theoretical background, the fact of rejection of H4a
and H4b might derive from two distinct or parallel causes. In Hungary, the general
company structural change is differently related to time development on an imagined
chronological axis, or the prescribed structure-firm age relationship is not significant
enough. The two might reinforce each other and output a strengthened negative
influence.
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394 Strategica 2016
Appendix
Figure 3. Structural model
Table 4. Summary of the Heterotrait-Monotrait Ratio
Entrepreneurial Environmental Environmental Financial
Orientation Dynamism Hostility Performance
Entrepreneurial
Orientation
Environmental 0.667
Dynamism
Environmental 0.260 0.213
Hostility
Financial 0.451 0.555 0.186
Performance
Firm age 0.300 0.178 00.58 0.151
Modelling and Prediction in Marketing and Management 395
TECHNOLOGY ENTREPRENEURSHIP IN ROMANIA - A GREAT
OPPORTUNITY FOR THE FUTURE YEARS
Anda GHEORGHIU
National University of Political Studies and Public Administration, Romania
30A Expozitiei Blv., Sector 1, 012104, Bucharest, Romania
anda.gheorghiu@facultateademanagement.ro
Abstract. The purpose of this paper is to discover what is the actual level of technological
entrepreneurship in Romania, a country that has recently become an important software
exporter of the world, despite the fact that the local economic framework is rather
average. The paper is structured as follows. First, it explores the literature relating to the
term of technology entrepreneurship and explores the issues of IT sector in Romania. The
methodological tools were data-mining and case studies, followed by an analysis of the
data and discussion of the results. Finally, the paper draws conclusions and makes
recommendations for future research, policy and practice. For Romania, technology
entrepreneurship is an immense opportunity. IT sector, above all, supports the Romanian
economy and is a top employer. The success of this boom has manifold explanations-
governmental support, highly qualified, cost-effective human resources. Romania is the
third leading country (after India and China) among software exporters. The present
study reveals big disparities among regions in Romania, since the large majority of
business incubators, business parks or hubs, spin-offs are located only in Bucharest area
and in the region of Transylvania. The study reveals that in Romania Business incubators
and Technology parks are very successful (such as Liberty Technology Park Cluj or Sema
Park in Bucharest). It is difficult, however, to establish the exact financial success of these
entities, since their members rarely disclose on their websites what are their profits,
turnovers, the number of employees. There are almost no data on spin-offs in Romania.
Yet, the disastrous case of UBIT, suggests that universities should be supported by both
local community and private companies. Co-working spaces are soaring recently in major
cities, hosting young entrepreneurs and start-ups, active in the sectors of technology or
creative industries.
Keywords: technological entrepreneurship; business incubators; technology parks; spin-
offs; co-working spaces.
Introduction
Scientific inventions and technological innovations can be fructified as new
entrepreneurial opportunities. Wireless technology and infrastructure development of
information technologies have become vital for entrepreneurship and small business
development in the latest two decades. In many developing nations, the so-called
called “technological entrepreneurship” is a major way to get a high level of
profitability. Romania, for instance, is a country that has recently become an important
software exporter of the world. The aim of this paper is to answer the question “What
are the key factors that have contributed to the actual level of technological
entrepreneurship in Romania?”
396 Strategica 2016
The paper explores the literature relating to the term of technology entrepreneurship
and explores the issues of IT sector in Romania. The methodological tools were data
mining and case studies, followed by an analysis of the data and discussion of the
results. Finally, the paper draws conclusions and makes recommendations for future
research, policy and practice. The method used for data collection was mainly Internet
research of atherogenic items like official statistics, legislation, independent studies,
press releases of business incubators and technology parks located in Romania.
Overview of literature on technology entrepreneurship
Dorf and Byers define technological entrepreneurship as „a style of business
leadership that involves identification and human resource high-potential
capitalization, technology-intensive commercial opportunities, managing accelerated
growth and significant risk taking” (Dorf & Byers, 2005). Shane and Venkataraman
explain technological entrepreneurship as „the processes of assembling resources,
technical systems and strategies by an entrepreneurial venture to pursue
opportunities” (Shane & Venkataraman, 2004, p.32). In 2012, Tony Bailetti argues that
„what distinguishes technology entrepreneurship from other entrepreneurship types
(e.g., social entrepreneurship, small business management, and self-employment) is
the collaborative experimentation and production of new products, assets, and their
attributes, which are intricately related to advances in scientific and technological
knowledge and the firm’s asset ownership rights” (Bailetti, 2012).
What are the forms of technology entrepreneurship?
Corporate spin-offs
Spin-offs are divisions of organizations that then become independent businesses with
assets, employees, intellectual property, technology, or existing products that are taken
from the parent company. The shareholders of the parent company obtain
correspondent shares in the new company with the purpose of compensating for the
loss of equity in the original stocks. Sometimes, an employee or group of employees
leaves an existing entity to form an independent start-up firm. The prior employer can
be a firm, a university, or another organization. For example, Fairchild
Semiconductor was a spin-out of Shockley Transistor; the founders were Shockley's
"traitorous eight", while Intel was, in turn, a spin-out of Fairchild, as many other
companies in the semiconductor industry.
Science parks, incubators
Science and technology parks (Research Parks or Techno-parks) encourage economic
growth and competitiveness of regions and cities by providing specialized facilities and
support services. Usually, S&T parks are associated with universities and support
university spin-off companies. The parks offer a number of shared resources, such as
incubators, programs and collaboration activities, reception and security,
uninterruptible power supply, telecommunications hubs, management offices,
Modelling and Prediction in Marketing and Management 397
restaurants, shops, bank offices, convention centers, parking lots, internal
transportation, entertainment and sports facilities, etc. Science and technology parks
are supported either by universities in order to bring in industry with which they can
collaborate or by local government in order to improve the prosperity of the
community.
Science and Technology parks finance themselves from fees from the rental of space
(land, infrastructure, building) and grants, investments, or payments by big companies
for R&D contracts, especially if the techno parks associated with universities and/or
research institutes (successful S&T parks are at Stanford, Oxford, Cambridge etc).
Business incubators are facilities established to nurture young (start-up) firms during
their early months or years. It typically provides access to some form of financing,
affordable space, shared offices and services, hands-on management training,
marketing support. Corporate incubators are designed for profit-oriented
organizations with which to improve a corporation’s technology improvement, while
university incubators endeavor to leverage technological insights from the university.
Business incubators differ from research and technology parks in their dedication to
start-up and early-stage companies. Research and technology parks, on the other hand,
tend to be large-scale projects that house everything from corporate, government or
university labs to very small companies.
The legal framework of technology entrepreneurship in Romania
In Romania, the Business Incubators are financed from both private and public
sources. The first Technological Business Incubators were established in the 90’s, with
financial support from PHARE Programme, The Ministry of Research and managed by
the Romanian Centre for Small and Medium Enterprises. Unfortunately, as soon as the
support was taken out, most of the incubators vanished.
In 2000, the Romanian Government has launched a program promoting construction
of IT-oriented technology parks – special zones that enjoy a favorable tax and customs
regime. Industrial parks and cheap labor in Romania have attracted huge companies
like Nokia, Emerson, P & G, Kaufland, Roca or Autoli.
Later, the Romanian state issued new laws to encourage the advancement of science
and technology parks. According to Law no. 50/2003 on Technology and scientific
parks, in Romania, Science and technology parks are an area where developed
activities as teaching, research, research are results dissemination, and where these
are exploited by economic activities. This was the start of an ambitious project, which
was the Multiannual Program of Establishment and Development of Technological and
Business Incubators in Romania (2002-2012), coordinated by The Agency of
Implementation of Projects and Programs for Small and Medium Enterprises
(A.I.P.P.SME’s), and implemented by The United Nations Development Program
(P.N.U.D.), Romania.
The aim of this Program was that of boosting the small and medium enterprises
(SMS’s) sector in Romania, by establishing Business Incubators and by improving the
efficiency of the existing Business Incubators. Indeed, all companies selected in the
398 Strategica 2016
Program received funds for the acquisition of equipment and partial reimbursement of
cost with utilities and consultancy services-recruitment process, in elaborating
business and marketing plans, feasibility studies, assistance in the process of
developing, and commercialization new products on both local and international
markets.
In June 2016, the Law no. 102/2016 on business incubators entered into force.
According to this act, founders of business incubators are entitled to a series of tax
incentives to be granted under aid schemes. Specifically, this involves exemption from
land tax, exemption from tax on buildings, exemption from payment of any taxes due
for release any urban planning certificates, building permits and / or demolition of
buildings for land and buildings related to the business incubator, with the approval of
local authorities. The „Business incubator” title is valid for ten years. On request, the
period of validity may be extended as long as the incubator still fulfills the conditions
imposed by law.
As shown in Law no. 102/2016, among the types of incubators that can be created are:
Technology Business Incubator (targeting SMEs with growth potential technology),
Academic business incubators (targeting SMEs whose work relates to the
implementation / use of results of research and development of a university or
research institute), Virtual incubator (offers incubation services via the Internet in the
form of business portals) and Incubator for non-agricultural activities in rural areas.
The business environment for technology entrepreneurship in Romania
In 2016, the World Bank has placed Romania 37th out of 189 economies analyzed in
terms of ease of doing business. Also useful is to know how it ranks relative to
comparator economies and relative to the regional average; in this respect, Romania
ranks number four, after Poland, Slovak, and Czech Republics. For a company
registered in Romania, opening a new business lasts 8 days. Payment of fees requires
14 payments per year, amounting to 42% of profits and 159 hours required. Sadly,
today, Romania is the second lowest economy in the European Union on individual
consumption and GDP per capita, after Bulgaria, according to recent data published by
Eurostat. A negative aspect of the Romanian economic and social background is the
declining demography and youth unemployment, exactly the human factors that could
be more involved in developing new technologies. As Dămășaru highlights, "the high
values of youth unemployment rate and disparities between urban-rural zones are
worrying. A serious concern for the employment of rural youth is more than entitled,
because of the inherent difficulties and objectives determined by the low level of
qualification and lack of experience, plus reduced offer of jobs for young people in
most rural areas. Targeted actions are important for self-employment and to generate
trade ideas." (Dămășaru, 2015, pp.27-28).
There is, happily, a big potential for growth. Now, Romania ranks 50 in a ranking of
the most prosperous population among 142 countries. This ranking, called the
“Prosperity Index” is compiled by the Legatum Institute in London. It is gratifying that
Romania's position has improved steadily over the past four years. In
“Entrepreneurship and Opportunities” field, Romania rose from 94th in 2012 to 69th
in 2015.
Modelling and Prediction in Marketing and Management 399
Despite such poor economic environment, Romania is one of the fastest-growing
information technology markets in Central and Eastern Europe, since in the last decade
it has made significant progress in basic telephony, mobile telephony, the Internet and
IT. Romania is the leader in Europe, and sixth in the world, in terms of the number of
certified IT specialists.
An event that has drawn the attention of the whole world as early as in 2003, was the
news that Microsoft acquired the Romania-based antivirus software vendor GeCAD
Software. This company was established in 1992 by Radu Georgescu as a Computer
Aided Design (CAD) software development company. Its most prominent product,
Reliable Antivirus, RAV, was first developed in 1994.
With a maximum speed of 73.6 Mbps internet services in 2015, Internet services in
Romania exceed those from many developed countries. In the latest five years, only
Bucharest has attracted more than 170 start-ups and means a rapid growth of big
software companies and IT services, which is revealed especially by the increasing
number of employees.
The presence of global technology corporations such as Intel, Motorola, Microsoft,
Oracle, Sun Microsystems, Boeing, Nokia, and others, helped the growth of the IT
industry , through software development activities and R&D own centres in Romania.
At present, Romania is the third leading country (after India and China) among
software exporters and the most important competitive advantage in software
development consists of its highly qualified, cost-effective human resources. IT
workforce is a driving force of Romania. On average, an entry-level worker receives a
salary of 500 Euros per month, whereas a director can win even 6,000 Euros per
month. Currently, in Romania, the universities offer annually 3,500 graduates who
quickly find jobs both at home and abroad.
14,000 IT companies operate at present in Romania, and, in 2014, they generated
cumulative revenues of 4 billion Euros and provide permanent jobs for 75,500
employees and also high incomes for 17,000 freelancers (“PFAs”). In fact, the IT
industry is the largest generator of business and jobs in Romania and will probably
carry on to be the fastest growing sectors in the years to come.
Brainspotting is the leading technology recruitment and selection consultancy in
Romania, working on highly specialized technologies for permanent and interim
positions. In a study published in 2014 (Romania IT Talent Map, 2014 Facts & figures),
the company reveals that Romanian universities have been Top 3 in the IEEE Design
Competition every year since 2001. Romania has more Informatics and Math Olympiad
medals than any other European nation and is 3rd globally after Russia (URSS) and
China. The number of engineers per capita is greater than in the US, India, China, or
Russia; Romania is in top 10 globally in the number of certified IT specialists. Almost
90% of IT professionals speak English.
Most university graduates in IT field are, of course, located in major cities of Romania,
and, consequently, the most important hot spots in Romania for IT and BPO services
are also located in the same regions. As one can observe, the most developed regions in
the computing area are the capital city, Bucharest, and North-West region (historically
known as Transylvania). Actually, half of the IT companies are located in Bucharest
400 Strategica 2016
and Cluj-Napoca. Other IT hubs are located in Iași (Moldova), Brașov and Râmnicu
Vâlcea (Central area of Romania), as presented in Table 1.
Table 1. The situation of IT hubs of Romania in 2014
City Region Competitive advantage of the city
Bucharest South-Vest Concentrates more than half of the IT workforce in Romania.
70% of the top 25 software companies with the highest
turnover in Romania have their largest Romanian teams in
Bucharest
Cluj- North-West One of the hot spots in Romania for IT and BPO services. In
Napoca 2012 it ranked 96th in Tholons’ top 100 outsourcing sites . The
current demand for IT talent surpasses the candidate pool.
Timișoara North-West One of the best-developed areas in Romania with social
unemployment figures close to the ones before the crisis. Used
to be the second IT hub in Romania, before the rapid
expansion of Cluj.
Iași North-East Great IT graduate pool compared to the demands of the
market. Less attractive for foreign investors than Cluj,
Timișoara, and Bucharest. Candidates are more willing to
relocate than those in Cluj, Timișoara, Bucharest.
Râmnicu Central area Small IT pool. Many German investments in the region.
Vâlcea
Brașov Central area Small IT hub, but close enough from Bucharest to be chosen as
a secondary place for a company headquartered in Bucharest.
Above national average availability of German skills
Adapted after Brainspotting ‘s study “IT Talent Map of Romania in 2014”
Examples of technology entrepreneurship entities developed in the last decade
in Romania
Spin-offs
Presently, there is no official statistics of the spin-offs in Romania. Definitely, the
university centres are the ones that provide the most spin-offs, since they concentrate
the highest number of researchers, academicians, engineers, and benefit from the best
IT, industrial, and communication networks.
One of the most illustrative cases of the spin-off is the one of UBIT SRL, located in
Timișoara city, a company that was active between 2003 and 2012. In fact, it is a rather
sad case. Several graduates ofthe Polytechnic University of Timisoara have established
some start-ups. One of these was UBIT SRL, a limited liability company established in
2003 by a joint venture of Local Council Timisoara, Timiș County Council and the
"Politehnica" University of Timisoara, with the support of GTZ (German Society for
Technical Co-operation ). The partners contributed with 400,000 lei each. The sole
domain of activity was the management of the Business Incubator and Technology
Transfer in Software field. An important objective was to encourage young people
remaining in the city.
The spaces were made available by the University Politehnica Timişoara, that offered
beginners in business an ideal working place. For 8 years, the center developed 19
companies, all at the expense of the University, while Timiș County Council has not
Modelling and Prediction in Marketing and Management 401
paid its obligations. This irregularity was discovered in 2015 by the Court of Auditors.
Now UBIT SRL is insolvent, and The County Council has debts of 850,000 lei to
Polytechnic University.
Business incubators
Currently, there is no official statistics of the business incubators in Romania. However,
the Internet provides a lot of pieces of information about this matter and the own
research of the author revealed that now, there are six important business incubators
in Romania (the latest being, in fact, a network of 11 local incubators). Most are located
in Bucharest and Transylvania, as presented in table 2.
Table 2. Most active business incubators in Romania-2016
Name of business incubator Location (city)
UBIT Timișoara Software Business
Timișoara
Incubator
Technological Business Incubator ITA
Arad
GOLDTECH ARAD
Center for Technology Information Fairs
Bucharest
and Exhibitions ICPE (CIT-TE ICPE)
CITAf -Technology and Business Incubator
Bucharest
Centre
Timișoara Startup Hub Timișoara
Alba Iulia, Brașov, Mangalia, Sf. Gheorghe,
The Incubators and Business Centers
Târgu Mureș, Cluj, Bacău, Satu Mare,
Association from Romania (AICAR)
Dorohoi, Câmpia Turzii, Timișoara.
Source: Online available data gathering of the author
An interesting case is that of AICAR (The Incubators and Business Centres Association
from Romania) that has been established in 2010. The aim of the Association is to
strengthen the role of business incubators in the economic development of Romania
and the initiative has been supported by the Agency for Implementation of Projects
and Programmes for SMEs and the United Nations Development Programme. The
members are business incubators from Alba Iulia, Brașov, Mangalia, Sf. Gheorghe,
Târgu Mureș, Cluj, Bacău, Satu Mare, Dorohoi, Câmpia Turzii, Timișoara. They are very
active in various fields, but, surely, the most important is IT domain.
Other fashionable small business incubators are located in the so-called “Co-working
(collaborative) spaces or hubs”. They are a new and vibrant type of technological
entrepreneurship. Co-working spaces goal is to provide an alternative to traditional
offices. This is targeted at entrepreneurs who are just starting out, start-ups and
freelancers who either cannot afford to rent space in an office building, or simply want
to join the community around these hubs. Bucharest, Cluj, Timișoara, Constanța, Iași,
Brasov, Sibiu, Galați and Oradea are the nine cities that have developed such hubs that
host entrepreneurs and start-ups, active in the sectors of technology or creative
industries, as presented in Table 3. Prices for subscriptions of renting an office (which
usually include access to events organized within the hub and access to various
facilities) are between 40 Euros and 150 Euros per month. There co-working spaces
designed in the form of social projects (Hub City Constanța) members who do not
charge rental fees, but some residents instead provides volunteer services to support
the operation of hub sites.
402 Strategica 2016
Bucharest Impact Hub is the most vibrant entrepreneurship hub of the capital city,
located right in the heart of Bucharest, launched in June 2012, by three young
investors. It is part of Impact Hub Global Network, an Austrian-based company, with
locations in dozens of cities worldwide (only in Europe, there are 46 spots). In 2015,
Bucharest Hub Impact had a consolidated turnover of 850,000 Euros. The hub
obtained incomes from four major sources: subscriptions of members, renting space
for events and related services, software acceleration and incubation (fee sites,
sponsorships, financing, depending on the program), collaborations with organizations
corporate or nonprofits various special projects.
Table 3. Co-working hubs in Romania-2016
Name of hub Location (city)
TechHub, Impact Hub Bucharest, Connect Hub,
Bucharest, Old city center
360HUB, Flash Hub, NOD, MobileHUB
ClujHUB, Cluj Cowork Cluj Napoca
Central Hub Sibiu
Hub 1317, Hub Onezero,Alchemy Hub Brașov
StartUP HUB Timișoara
City HUB, Forte Life Constanța
Coworking Oradea Oradea
Bankers Hubb Galați
The Grape Iași
Source: Online available data gathering of the author
Technology parks
At present, there is no official statistics of the technology parks in Romania. However,
by far, the most famous one is Liberty Technology Park Cluj, a private technology park,
created to offer exceptional growth and developing for companies in the IT&C and R&D
and digital industries in one unique area both conceptually and architecturally, in top
office spaces class A in Cluj-Napoca (total surface of 46 880 square meters).
In 2013, Fribourg Development, a subsidiary of the investment fund Fribourg
Investments Cyprus, begun the work on technological park Liberty, created by the
conversion of a furniture factory in a park for IT companies, an investment amounting
to 25 million euro. It offers the first business accelerator in Romania – Spherik,
research laboratories, event areas but also relaxation areas (restaurant, coffee shop,
fitness gym, playgrounds for children). Transylvania particularly has come to an
impressive developing in tech industries, becoming in the last few years a true heart
for them. Cluj-Napoca was frequently compared to the Silicon Valley area.
In this technology park, the large majority of firms activate in the IT and telecom
industry. Although on the website, companies are not categorized, I tried to make a
classification according to their main field of activity. I found out that there are no less
than 10 companies with their main field in IT or telecom: Halcyon Mobile, Ecuson
Studio, Control Data Systems, GTS Telecom, Luminos Software, Voquz , Supp Office,
Altran, Arvato. Other companies activate in very different fields, such as: automotive
(Siemens), FMCG (La Casa), financial services (KPM), climate Solutions (Regal Beloit
Romania), hubs for business (Impact Hub Cluj-Napoca), logistics (Nordstar Logistik),
architecture-design (Omifa), and leisure (Liberty Fitness), services (Spherik
Modelling and Prediction in Marketing and Management 403
Accelerator, offering 3 months of 1-1 help, workshops, international mentors,
networking, product, strategy, marketing, pitching) and Makronetz (other services).
SEMA Park is one of the most representative industrial parks in Bucharest, developed
on the former premises of the Semanatoarea factory space, in Grozăveşti area, close to
the Polytechnic Institute. Developed in 2008, on an area of land which two decades ago
belonged to a significant drill factory, the industrial park Sema Parc offers those who
work here all the facilities necessary for organizing and carrying out the activities. The
infrastructure owned by Sema Logistics includes: interior access roads with a total
length of 2500 m and area of 2 ha, electricity, Internet access, drinking and industrial
water, sewerage and gas, dock, bridge cranes, parking lots.
The "Magurele Science Park" project was launched in 2015. Project's initiators were
the Ilfov County Council, the Magurele Local Council, the INCDFIN Horia Hulubei, the
Magurele High Tech Cluster and the Bucharest-Ilfov Association of Intercommunity
Development. The Ilfov County Council and the Magurele City Mayor support the
project by participating with the approximately 40 hectares respective land and taxes
cut according to the law. The project is an innovative cluster-like open association
interested in the exploitation of the businesses potential, of transfer of knowledge and
technology which is offered by the Magurele research and academic community and in
the perspective the ELI-NP project, under way of being implemented. The fields to be
beneficiaries of the future project are very large, including communications,
electronics, computers, lasers' engineering, optical engineering, accelerators'
engineering, nuke engineering (Romanian National News Agency AGERPRES).
Conclusions
For Romania, developing technology entrepreneurship units is a great chance. IT
sector especially supports the Romanian economy and is a top employer. The success
of this boom has manifold explanations-governmental support, highly qualified, cost-
effective human resources.
In 2000, the Romanian Government has launched a program promoting construction
of IT-oriented technology parks – special zones that benefited from a favorable tax and
customs regime. Industrial parks and cheap labor in Romania have attracted in the
latest 15 years many global companies, such as Intel, Motorola, Microsoft, Oracle, Sun
Microsystems, and others, helped the growth of the IT industry , through software
development activities and R&D own centres in Romania.
Romania is one of the fastest-growing information technology markets in Central and
Eastern Europe. In particular, it is the leader in Europe, and sixth in the world, in terms
of the number of certified IT specialists. The country is a champion of Internet speed in
Europe and is the third leading country (after India and China) among software
exporters.
14,000 IT companies operate at present in Romania, and, in 2014, they generated
cumulative revenues of 4 billion Euros and provided permanent jobs for 75,500
employees and also high incomes for 17,000 freelancers (“PFAs”). In fact, the IT
404 Strategica 2016
industry is the largest generator of business and jobs in Romania and will probably
carry on to be the fastest growing sectors in the years to come.
Unfortunately, the present study reveals big disparities among regions in Romania,
since the large majority of business incubators, business parks or hubs, spin-offs are
located in Bucharest area and in the region of Transylvania. The rest of the regions,
particularly Moldova and Oltenia are very weakly represented in terms of the
technology entrepreneurship. This fact has certainly historical explanations since these
regions lag behind in many sectors. But for these unfavored areas, exactly the
opportunity of exploiting people intelligence is a big opportunity for the future years.
Presently, there are very few official statistics on technology entrepreneurship in
Romania. Data mining in this field is a difficult task. However, the Internet offers some
press releases of companies or business incubators that can be used by researchers.
The study discloses that in Romania Business incubators and Technology parks are
very successful (such as Liberty Technology Park Cluj or Sema Park in Bucharest). It is
difficult, however, to establish the exact financial success of these entities, since their
members rarely disclose on their websites what are their profits, turnovers, the
number of employees.
There are virtually no data on spin-offs in Romania. However, the sad case of UBIT,
presented in this study, give a clear signal that universities should be more sustained
by both local community and private companies to develop their own research centers,
technologies and even companies (spin-offs) that can tremendously contribute to the
local development, retaining educated workforce, and, why not, to the prestige of the
cities they activate in.
Co-working (collaborative) spaces or hubs are soaring recently in Bucharest, Cluj,
Timișoara, Constanța, Iași, Brasov, Sibiu, Galați, and Oradea, hosting young
entrepreneurs and start-ups, active in the sectors of technology or creative industries.
They can be the cradle for future successful companies; we shall be able to check this
assumption in the next decade.
A ray of hope for Romanian technological entrepreneurs is the enforcement of the Law
no. 102/2016 on business incubators. According to this act, founders of business
incubators are entitled to a series of tax incentives to be granted under aid schemes,
such as exemption from land tax, tax on buildings, exemption from payment of any
taxes due for release any urban planning certificates, building permits.
Recommendations for future research, policy, and practice:
a) The Romanian state should continue to encourage the advancement of the
technological Entrepreneurship under the Agenda 2000 of the European Union,
exempting from some taxes the technological startups and helping them to develop by
establishing an innovative and collaborative framework especially for startups, for
SMEs.
b) Local communities, especially those located in desadvantged areas, like Moldova or
Oltenia, should contribute with land, fiscal facilities and different types of services
offered to those persons and companies that intend to activate in technological parks,
business incubators, collaborative hubs. They should also help local universities to
Modelling and Prediction in Marketing and Management 405
develop, create R&D centers and retain youngsters through innovative jobs in their
spin-offs.
c) The author intends to further research what is the financial, human resources,
products and markets evolution of the companies that activate in the business
incubators and technology parks of Romania, by searching the financial data and other
pieces of information that can be obtained from the National Agency of Fiscal
Administration and other institutions.
References
AGERPRES (2015). Communicate -The "Magurele Science Park" project is launched.
AICAR (The Incubators and Business Centres Association from Romania).
Retrieved from http://www.aicar.ro/en/members.php.
Bailetti, T. (2012). Technology Entrepreneurship: Overview, Definition, and Distinctive
Aspects. Technology Innovation Management Review, 10(1), 5–12.
Brainspotting-IT Talent Map Romania (2014). Retrieved from
http://www.brainspotting.ro/files/Brainspotting_IT_Talent_Map_Romania_2014.pdf.
Dămășaru C. (2015). Managementul potențialului antreprenorial în Romania rurală
[The management of the antreprenorial potential in the rural Romania].
Bucharest: Prouniversitaria.
Dorf, R.C., & Byers, H.T. (2005). Technology Ventures: from Idea to Enterprise. New
York: McGraw-Hill.
Eurostat, Statistics explained (2015). Retrieved from
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explained/index.php/National_accounts_and_GDP.
Legatum Institute-“Prosperity Index” (2015). Liberty Park Cluj-Residents
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residents.
Official Monitor of Romania, a collection of legislation (2000-2016).
Shane, S., & Venkataraman S. (2004). Guest editors introduction to the special issue on
technology entrepreneurship. Research Policy, 32(2), 181–184.
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fromhttp://www.doingbusiness.org/data/exploreeconomies/romania/~/medi
a/giawb/doing%20business/documents/profiles/country/ROM.pdf.
Management and Leadership
Management and Leadership 407
ENSURING THE VIABILITY OF ROMANIA’S INSTITUTIONS OF
HIGHER EDUCATION: THE NEED FOR STRATEGIC PLANNING
Victoria A. SEITZ
California State University San Bernardino
5500 University Pkwy, San Bernardino, 92407 CA, United States
vseitz@csusb.edu
Olesia MIHAI
Alexandru Ioan Cuza University of Iași
11 Carol I Blvd, 700506 Iași, Romania
olesiamihai@yahoo.com
Abstract. Institutions of higher education are no longer immune to external forces
affecting its operations. Plagued by rising costs, intense competition from private, public,
vocational, and online institutions, declining support from the state, and a view that
education is a commodity much like any product, universities are turning to strategic
planning to anticipate and ward off these threats to grow and survive. In the European
Union, the issue of strategic planning has been slow in development as part of planning
and policy making for institutions of higher education. This has been due, in part, to the
particular nuances that prevail in the EU as oppose to the US, such as the expanse of
institutions across borders and the emphasis on state control. Moreover, as a collective
body, the EU has focused on initiating policies that support standardization across its
educational landscape to remain competitive on a world stage. The Bologna Declaration
was initiated to bring about greater compatibility of degrees and diplomas and to
eliminate impediments to mobility between countries, increase employability of its
workforce and increase competitiveness in a globalized educational market. For
Romania, strategic planning has been ineffectual given the strong hand of the state and
the limited management experience among administrators (Nicolae & Vitelar, 2013). As
a part of the EU, Romania has been involved in some training in strategic planning;
however, emerging from a communist regime, has hampered its ability to integrate this
tool successfully to realize each institution’s full potential and position it for its future
success and survival. According to Voorhees (2008) strategic plans fail more often than
they succeed in its implementation because of the failure to connect the dreams and
aspirations that arise in strategic planning with specific actions. Moreover, failure of a
plan results from leadership’s inability to follow a shared governance model in
developing the strategic plan that brings the organization onboard in fulfilling the goals
and strategies outlined in the plan. Hence, this paper describes strategic planning and
outlines the process for successful integration and implementation.
Keywords: strategic planning; higher education; European higher education area;
institutional planning; Romania higher education; Bologna declaration.
408 Strategica 2016
Introduction
Institutions of higher education are no longer immune to external forces affecting its
operations. Plagued by rising costs, intense competition from private, public,
vocational, and online institutions, declining support from the state, and a view that
education is a commodity much like any product, universities are turning to strategic
planning to anticipate and ward off these threats to grow and survive. According to
Voorheers (2008, p.77), strategic planning is “idea management where ideas are
developed, categorized, processed and implemented”. Based on an assessment of the
institution’s strengths and weaknesses, and the opportunities and threats prevalent
outside, a strategic plan focuses on leveraging the institution’s strengths in capturing
opportunities to optimize the educational experience for students.
Hence, this paper describes strategic planning and outlines the process for successful
integration and implementation. According to Voorhees (2008, p.5), strategic plans fail
more often than they succeed in its implementation because of the failure to connect
the dreams and aspirations that arise in strategic planning with specific actions.
Moreover, failure results from leadership’s inability to follow a shared governance
model in developing the strategic plan that brings the organization onboard in fulfilling
the goals and strategies outlined in the plan. In view of Donoff and Rosser (2016),
transparent strategic planning process reduces uncertainty and resistance to change in
an ever-evolving educational landscape. Although strategic planning is essential to
realizing a university’s potential and warding off external threats, it is how the process
is conducted that drives the institution in the successful implementation and its
survival.
Since the 1970’s strategic planning was introduced in the US as a tool to guide
universities to dodge threats and grow amidst reduced public support both by the
state and federal governments. According to Dooris, Kelley and Trainer (2002),
strategic planning in the 80’s was considered a rational tool for the orderly
advancement of the institution. In the 1990’s, accrediting bodies mandated that
universities, as well as colleges, be guided by the strategic planning process in the
assurance of learning (Dooris et al., 2002).
The issue of strategic planning has its critics and supporters as the academy moves
toward a more business-centered model in the delivery of knowledge. According to
Dooris et al. (2002), some question whether it’s vital to the success of an institution or
the latest fad. Universities and colleges are wrestling with their identity as academic
enterprises rather than institutions of higher learning. But with declining public
support, growing competition, and rising costs, universities are forced to focus on
those entities that bring positive cash flow to a stricken university budget rather than
creating citizens of the world. According to Choban, Choban and Choban (2008, p.1)
“Strategic plans should be aimed at producing the best student learning experience in
the most cost-effective way, not the most cost-effective program in the most
convenient way”. However, increased accountability from external stakeholders such
as the state and national governments are driving the need for strategic planning for
institutions of higher education observe Welsh, Nunez, and Petrosko (2006). While
university administrators are supportive of strategic planning, the faculty is sensitive
to the growing business culture that prevails in the academy (Elwood & Leyden, 2000;
Welsh et al., 2006).
Management and Leadership 409
The process of strategic planning
According to Austin (2000), the strategic plan is a long-range plan for an institution
that provides the foundation for budgeting, human resources, and enrollment
management. As well, it is a living document that is constantly revisited as goals and
objectives are modified and measured as the organization’s environment changes. The
four components of a strategic plan include the vision and mission that contribute to
the identity of an institution, followed by the goals and objectives. The vision is the
desired future condition of the institution while the mission is the institution’s purpose
for existing. In formulating the vision it is essential that university leaders see their
roles as catalysts rather than owners of it (Elwood & Leyden, 2000). The mission
clearly spells out what is important and what is not; it identifies markets served and
the general direction of the institution. Goals are how the institution will accomplish its
vision and mission while objectives are specific measurable actions to accomplish the
goals. Failure results when ideas and aspirations brought forth are not linked to
specific actions and outcomes (Voorhees, 2008).
Massen and Potman (1990) outlined three strategic models for planning that included
the Linear Strategy Model, the Adaptive Strategy Model, and Interpretive Strategy
Model. All strategy models are similar except in their assumptions of the relationship
between the organization and its environment. In the Linear Model, it is assumed that
the organization is insulated from the environment and that the environment is
predictable. In the Adaptive Model, the organization strives to match its capabilities
with the opportunities and risks in the environment. Here, the primary assumption is
that an open relationship exists between the organization and its environment and is
responsive to it. In the Interpretive Model, Massen and Potman (1990) suggest that
strategy is developed through desired relationships with the environment and
organizational stakeholders with an emphasis on motivating these stakeholders.
Strategic planning occurs at the institution, college, and departmental levels and
incorporates both qualitative and quantitative data for the desired end result.
Components include an environmental scan, competitive analysis, enrollment
forecasting and scenario building, instructional viability analysis and an analysis of the
labor market (Voorhees, 2008). The strategic planning process reflects the past,
present, and future of an institution as it views and establishes its mission and vision
for the university. The actual process of strategic planning starts with data drew from
multiple sources such as competitors, interviews with key stakeholders such as the
community, and focus groups with students, faculty and university administrators.
Competitor analysis is beneficial to institutions as the basis for starting new programs,
modifying existing ones or eliminating redundant ones. Competitor analysis looks at
institutions in the geographical area as well as those that are considered peer
institutions (Voorhees, 2008). It is imperative that the institution identify titles of
competitor programs and content to make an accurate assessment of their offerings.
Enrollment building scenarios are quantitative and are beneficial to strategic planning
in anticipating the future course of an institution. Using current enrollment figures
coupled with population growth estimates from the state, institutions can build several
enrollment scenarios targeting specific segments such as 18-24 year-olds, adult
learners or international students.
410 Strategica 2016
For strategic planning to be successful it must involve the faculty and staff. Elwood and
Leyden (2000) note that faculty has been reluctant to support strategic planning due to
a culture inherent in the academy that prides itself on autonomy and academic
freedom. Moreover, the faculty has not seen the need to change or to view students as
customers rather than receivers of knowledge (Elwood & Leyden, 2000). In the
interim, the relationship between higher education and society has been what society
needs rather what is the role of the university in society (Elwood & Leyden, 20000).
The researchers point out those institutions must take this culture into account when
conducting strategic planning and involve faculty. Such planning without their input
will result in a lack of implementation since they are at its core of the institution’s
mission. Hence, involving faculty and staff in strategy sessions is essential and creates
two-way dialogue in driving changes to the institution in a changing environment.
Additionally, Elwood and Leyden (2000) state that universities must establish linkages
with external constituencies and entities since changes affecting them are external.
In formulating a sound strategic plan, Jasinski (2004) highlighted the best practices of
universities that have received the Malcom Baldrige National Quality Award. The
Baldridge Award recognizes companies, educational institutions and health care
providers for excellence in performance throughout the world. In strategic planning,
the first key to success is having a clear path to developing the plan with processes
outlined and key participants identified. Successful strategic planning is an ongoing
process of periodic reviews and adjustments to the mission, vision, values and specific
phases for plan development (Jasinski, 2004). Additionally, universities need to have a
systematic process for collecting data internal to the organization and external to the
environment so that an accurate assessment of strengths, weaknesses, opportunities
and threats (SWOT) to the organization can be made.
Once this assessment is conducted the organization outlines four to six goals from the
input to address the major challenges to the institution. Consideration should be given
to long and short term goals, depending on the needs of the organization as well as the
needs of students. Next, the institution outlines a timeline for deploying the plan with
consideration to budget allocation and regular process checks. Benchmarks are used to
report on the progress of action plans and compare them to projected outcomes and
competitor performance. In evaluating goals and objectives, Jasinski (2004) states that
human resource issues, technology, and academic plans need to be clearly identified
since they involve faculty and staff recruitment and retention, technological systems
upgrades and academic programs, and student success. Lastly, Jasinski (2004) points
out that open, simple and frequent communication must be the foundation of
implementing an institution’s strategic plan as it serves to inform, provide structure
and intention to it.
Strategic planning in higher educational institutions in the European Union
In the European Union, the issue of strategic planning has been slow in development as
part of planning and policy making for institutions of higher education. This has been
due, in part to the particular nuances that prevail in the EU as oppose to the US such as
the expanse of institutions across borders and the emphasis on state control.
Moreover, as a collective body, the EU has focused on initiating policies that
standardize its educational landscape to remain competitive on a world stage. The
Management and Leadership 411
Bologna Declaration was initiated to bring about the greater compatibility of degrees
and diplomas and to eliminate impediments to mobility between countries, increase
the employability of its workforce and increase competitiveness in a globalized
educational market. The Bologna Process established the European Higher Education
Area (EHEA) that encompasses over 4,000 institutions, almost 20 million students, and
approximately 2 million staff and set forth directives to transform European higher
education into a three-cycle system of Bachelor’s, Master’s and Doctoral degrees.
Moreover, it set in motion quality assurance metrics to measure educational
performance in programs across the EHEA (Seitz & Nicolae, 2014).
However, the emphasis on strategic planning has only recently gained importance as
institutions grapple with declining state support, increased global competition, and
increasing enrollment from a mobile student population. However, a major issue is the
limited knowledge of market-driven factors among management to set apart
institutions from their competition and grow. Moreover, higher education institutions
in Europe are among the oldest with complex hierarchical structures. Machado and
Taylor (2010) point out three models used in higher education institutions in Europe
that include: 1) the Humboldtian Model where professors and students operate freely
in their studies and teaching; 2) the Anglo-Saxon Model where there is little state
involvement and autonomy among professors and students; and 3) the Napoleonic
Model where governance is centralized.
In the last 30 years, Europe’s landscape of higher education institutions has expanded
to include vocational and technology institutes, online open institutions, in addition to
traditional universities. This crowded arena of educational providers has exerted more
demand on dwindling state budgets, along with growing demands from external
stakeholders for knowledge and wealth creation. With the social relevance of higher
education coming into question upholding significance and being strategically
positioned to capitalize on opportunities makes strategic planning ever more critical
(Taylor, Machado & Peterson 2008). Similarly to the US, the stability experienced in
previous decades are no longer and are driving higher education institutions to create
and maintain a competitive advantage while demands for accountability surge.
According to Machado and Taylor (2010, p.50), strategic planning separates good
institutions from the excellent ones for several reasons: 1) it improves performance in
meeting the mission statement; 2) it improves the academic standing of its programs;
3) it increases accomplishments with the same or fewer resources; 4) it clarifies the
future direction of the institution; 5) it helps meet the obligations associated with
accreditation; 6) it addresses threats and other problems as well as identifies
opportunities of importance to the institution; and 7) it brings the university
community together toward the accomplishment of a goal.
Throughout Europe most higher education institutions see the value of strategic
planning; however, implementation is at different stages with Italy at the initial stages
and Denmark advanced in institutional planning (Machado & Taylor, 2010).
Furthermore, most European institutions see the US involvement abroad in strategic
planning in higher education in a distrustful manner since American universities lack
an understanding of the extent of diversity between countries in Europe (Machado &
Taylor, 2010).
412 Strategica 2016
Strategic planning in Romania’s higher education system
For Romania, strategic planning has been ineffectual given the strong hand of the state
and the limited management experience among administrators (Nicolae & Vitelar,
2013). However, Romania’s central planning of higher education is not unique as many
members implement policies mandated by the state. As a recent inductee to the
European Union, Romania is standardizing its policies and procedures according to the
Bologna Process without recognizing each university’s strengths and ability to govern
themselves (Seitz & Nicolae, 2014). In essence, universities are given all the
responsibility, but not the authority or the budget to operate independently (Seitz,
Mihai & Mettias, 2014). Reisz (2006) notes that Romania in 1996 allowed institutions
to be autonomous in their academic function; however, they continue to oscillate
between centralism and autonomy in governing themselves as the legacy of socialism
continues. Seitz et al. (2014) advocate that the Ministry of Education must allow
institutions to define their strategic mission within the confines of the law to be
competitive in a growing educational marketplace. Issues such as hiring, faculty
recruitment, curriculum development, and resource allocation should be localized to
compete and prosper (Seitz et al., 2014). Moreover, accrediting bodies in the EHEA
support and recommend strategic planning in a broad – based inclusive decision-
making environment that has been lacking in Romania’s institutions of higher
education (Nadler, Miller & Modica, 2010). In this model, university administrators
would collaborate with key stakeholders to develop the institution’s overall priorities
and “define what kind of school it is, whom they are responsible to, and whom to hire,
while working towards approval by appropriate bodies within the institution” (Berg,
Csikszentmihaly & Nakamura, 2003, p.46). These key stakeholders include faculty and
staff and without their support, no strategic plan is successful in its development or
implementation.
As a part of the EU, Romania has been involved in some training in strategic planning;
however, emerging from a communist regime has hampered its ability to integrate this
tool successfully to realize each institution’s full potential and position them for their
future success and survival. In their study of university administrators, Nicolae and
Vitelar (2013) found that there is a need for meaningful change in the governance of
Romania’s institutions of higher education built on a foundation of formal training in a
wide variety of areas including strategic management, leadership, and strategic
planning.
Strategic planning: a university example
Effective leadership is essential in strategic planning since it is often the University
president or rector that initiates the process. However, to be successful in its
implementation, the university community, including faculty, staff and students must
be involved in its development. What follows is an example of a southwestern
university in the United States that recently went through this process and is now
implementing its newly developed strategic plan.
Starting in 2014 California State University San Bernardino embarked on developing
their strategic plan for 2015 – 2020. This initiative was set forth by the president of the
University that mandated that the process is organic and transparent. The president,
Management and Leadership 413
with help from his cabinet, identified individuals that would lead this university
endeavor and two individuals were selected to serve as co-chairs: one was the Vice-
President for Information Technology, while the other was the Chair of an academic
program. A Strategic Planning Advisory Committee (SPAC) was formed that included
members drawn from faculty, staff, deans, students, the Office of Institutional
Research, the Office of Assessment and Research in the College of Education, the
Institute for Applied Research, and an external consultant. This committee was tasked
with reviewing and clarifying the University’s mission, vision, and values that led to a
focused list of five strategic goals. These five strategic goals went beyond departments,
colleges and administrative units and focused on student success, faculty and staff
success, resource sustainability and expansion, community engagement and
partnerships and lastly identity. SPAC met a minimum of twice a month and held
several town hall meetings during this period when the goals were being developed to
solicit feedback from the university community. A website was developed for the
specific purpose of reporting on the progress of SPAC as well as soliciting feedback
from the university and local community.
Once the five strategic goals were identified Working Groups (WG) were formed for
each of the goals that included co-chairs and approximately seven members drawn
from faculty, staff and students from across the university. The WGs met every week to
develop the objectives for each goal. For each objective, the emphasis was to create
measurable ones that could be evaluated annually during the five-year period of the
plan. For each objective, developed strategies were identified that would help achieve
them. Open forums and additional town hall meetings were held with the University
community and the local community for feedback during the process that occurred
from January through May. Also during this time SPAC met with the Faculty Senate on
a continuous basis to report on their progress. The technology was incorporated every
step of the way to share the information and solicit feedback from University members
when they were unable to attend the town hall meetings or open forums. SPAC
collected feedback resulting in more than 2,500 points of data from direct contact or
responses on the website during several iterations of the plan.
As mentioned the five goals that were developed by the SPAC were student success,
faculty and staff success, resource sustainability and expansion, community
engagement and partnerships and lastly identity. The student success goal focused on
learning experiences that promote student success such as incorporating high impact
practices, maintaining high academic standards and reducing the overall D, F,
withdrawal and incomplete rates and meeting and exceeding graduation and retention
rates. Objectives surrounding this goal also examined graduate education across the
University with strategies to conduct a needs assessment among graduate students
and programs.
Goal two focused on faculty and staff success goal and centered on creating an
environment where excellence in teaching and research thrived. Some of the objectives
to support this goal included the development of a Center of Excellence for research
and increasing tenure-track density faculty. Strategies focused on increasing funding to
support faculty recruitment and to reduce the overall student-faculty ratio.
Additionally, staff success involved increasing training opportunities for staff through
development of a professional development and training plan within the duration of
the five-year period.
414 Strategica 2016
The third goal focused on resource sustainability and expansion with an emphasis on
stewarding resources for sustainability, yet acquiring new sources of funding.
Objectives focused on securing national public and/or private partnerships,
developing an infrastructure to enable the University launch entrepreneurial activities,
and increasing philanthropic productivity. Strategies to obtain these objectives
included engaging in a collaborative process to identify priorities and areas of
expertise and excellence that would attract public-private partners, cultivating a
culture of entrepreneurship and innovation as an incubator of business and social
enterprise, developing collaborations between academic leadership, faculty and
administration to ensure an environment for entrepreneurial activities, and increasing
non-resident enrollment.
Goal four focused on community engagement and partnerships at the local, regional,
state, national and global levels to enhance social economic and cultural well-being.
Objectives focused on identifying strategic opportunities for aligning community needs
with university resources for mutual benefit, increasing the number of strategic
community-university engagement activities, increasing service learning activities in
the curriculum and publicizing the university’s commitment to community
engagement. Strategies to reach these objectives included reviewing policies to
eliminate barriers to community engagement, developing support systems for faculty
and staff to engage in community initiatives and research, increasing university
funding to stimulate new curricular service learning activities, and ensuring all
recruitment advertisements for faculty, staff and administrators reflected this
commitment to community engagement.
Goal five centered on the university’s identity with objectives focused on developing an
identity for the university and highlighting its distinctive qualities, creating a vibrant
and memorable student life experience to increase student engagement, increasing
prospective students’ perceptions of the university as the university of choice,
increasing positive perceptions of the university with internal and external audiences,
and increasing alumni engagement. Strategies to achieve these objectives included
developing several major events that celebrate alumni accomplishments; developing
more career networking opportunities; developing a student-to-prospective-student
campaign to promote the university as a first-choice option; identifying and branding
university traditions and signature events; creating gathering spaces to encourage
student engagement; and developing an integrated marketing communications plan to
reinforce its identity with internal and external audiences.
In developing the objectives and strategies it was imperative that they were
measurable so target percentages and frequencies were included as a basis for
quantifying accomplishments when the plan was evaluated annually. After the
strategic plan was finalized and vetted with the university community funds were
allocated to support implementation. Once the budget has developed the plan and the
budget were shared with the university community for their feedback.
Management and Leadership 415
Conclusion
Strategic planning is essential given reduced government support and an ever
changing environment not only in the US but in the European Union as well.
Universities and colleges can no longer survive as an “Ivory Tower” and must
implement strategic plans that leverage their strengths and capitalizes on external
opportunities while warding off threats. This paper provided an overview of strategic
planning and the steps involved to develop a plan for a university’s future. To illustrate
the process, an overview was provided of how a southwestern university in the United
States has recently implemented the strategic planning process. It is critical that the
process is initiated by the president or rector and involves the university community
to gain “buy-in” of the plan. Moreover, goals, objectives, and strategies expressed in the
plan must be measurable so that it can be evaluated throughout the period of duration.
Finally, once the plan is in place, the budget to implement it must be allocated so as to
bring the strategic plan to fruition for the betterment of the university and its students.
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Management and Leadership 417
INTERDISCIPLINARY FIELD OF STRATEGIC AND CHANGE MANAGEMENT IN
THE GROWING HUNGARIAN SMES SECTOR
Attila KURUCZ
Széchenyi István University
1 Egyetem tér, 9026 Győr, Hungary
kurucz.attila@sze.hu
Abstract. The change management has become a more important part of the companies’
management. It is not only a slogan. The SMEs have more change projects at the same
time. The classic change management models always contain some cyclical processes, as
Want’s model does as well. The basic characteristic of change management has shifted.
The SMEs face the so-called Change Flow that requires different management technics
and project management methods. The model also helps to find out which elements of the
developing process are left out. This paper presents an interesting phenomenon through
two case studies of Hungarian SMEs. The leading idea of the research has come from the
observation and cooperation with two Hungarian SMEs. The intensive growth of the
machinery company observed in 2012-2013 and the analysis of the management’s daily
challenges stressed out the need of change management on a daily basis. A number of
lessons are emerging through an IT company we have been observing since January 2014
about the development of strategic thinking and the behavior of an SME in change
(perhaps crisis) situation. SMEs change management concept is examined by Want’s
change model show that companies predominantly face changes in operations and in
several cases, they decide about basic changes. The well-structured process of changes
can be ensured by a complex model that is close to the practice. Therefore, Want’s change
model has been selected for the research. Overall, SMEs – usually in an unconscious way -
support their long-term business operations by managing changes, however, the
management of changes influencing strategy remain out of consideration. In other
words, in SMEs’ lives strategic management and change management do not consciously
co-relate. According to our assumption about the new characteristics of changes, the
SMEs need to find out new methods, and behavioral patterns. The strategy is not enough
itself.
Keywords: SME; change management; strategic management; leadership; change flow.
Introduction
Small and medium-sized enterprises (SMEs) form an important sector of the
Hungarian economy from numerous aspects. Especially remarkable is the performance
of SME leaders having managed enterprises for decades. Business context has changed
significantly since the change of regime. Today’s small enterprises play key roles in
supply chains and they have international experience both through their procurement
and sales processes (Chikán & Demeter, 2002).
Economic policy has not always been supportive towards SMEs. In some cases
improvement measures were taken after recrudescence, however, since 2012 a
massive load of administration has been laid on the sector. Furthermore, SMEs
struggle with high taxes and contributions. Despite all those difficulties, there are
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successful SMEs able to grow. They have found efficient ways to handle changes and
their strategies are based on followable and realistic concepts.
In practice, small enterprises are often blamed for having no strategy. In lack of
strategy, they can hardly cope with changes. There is no real flexibility, instead, they
try operative, less efficient and less complex solutions.
The formal strategy is almost never used, even planning process or methodology is
hard to find. Therefore, it is interesting to examine how SMEs can succeed with a
future in the twilight zone. As business environment is volatile, change management
has become a daily routine for every business entity. Also for SMEs, there are cases
when change is vital. Not all measures are conscious; there are giant steps, sudden
major changes. Those moments are interesting from management science aspect, as
rapid behavior alterations bring significant changes in SMEs’ lives; however, they
survive during fighting with those elements. In this study, such situations are analyzed
involving two companies. This research test is meant to prove a concept, it should be
considered as a pilot of a later, broader-scale research.
Change models – methodology basics
In management literature, business changes can be classified by change models. Each
change model reflects the observation, analysis, and interpretation of changes. There
are many types of models and none of them provides a general routine to handle
changes, they rather work as compasses. Not any of the models beats the other, they
just suit different situations. The change processes of SMEs are now viewed using one
specific model structure so that we can make a comparison and conclude.
Strategic and change management theory
For small and medium-sized enterprises the terms strategy-change-performance have
the same interpretation as for big companies. A future status should be visualized and
then it should be achieved. If it is achieved, we may say that we have performed well. If
this concept is understood by an SME leader, he may already hear the internal voice:
„Have a strategy!”. That is the way it should be – a strategy is required. However, it is
not that simple for SMEs. There are few owners – entrepreneurs who could afford to
attend management seminars, learn techniques and methods how to create strategies
and manage their own businesses at the same time (Chikán, 2010).
Of course, such training is not essential to build a successful business. There are
hundreds of strategies from 100-page formal ones made up systematically to those
visions existing in SME managers’ heads and referred to on a daily basis. One feature is
common, though – they all formulate the future portrait of a company. For that reason,
it is important from performance aspect how we see the future, the company’s future.
In a small business, the leader has a vital role, he is often the owner and manager
simultaneously. The key person is the entrepreneur.
There is one trend of strategic concepts that gives a key role to the entrepreneur, the
organizing force that integrates, controls and helps as an active player the enterprise.
Management and Leadership 419
The company’s operations, culture and future depend on him. This is the
entrepreneurial strategic school (Mintzberg, Ahlstrand & Lampel, 1998).
That strategic approach is excellent for SMEs – the entrepreneur manages the
company on his own towards success using his own future vision. The emphasis is on
vision, the way the leader visualizes the company. In some cases, it sounds too obvious,
but thousands of businesses and case studies prove that simplest ideas bring superb
results, as soon as an entrepreneur makes his vision real.
The vision is thus the mental form of strategy that is born in the leader’s mind, or at
least it is created there. The vision does not appear in figures or precise goals, it is
rather an image that can be easily linked to the entrepreneur and the everyday life of
the one-person management.
Small, often disadvantageous organizations obviously need strategies too.
Nevertheless, due to their size and the more difficult financial position they can hardly
find resources for the services of consulting and market research companies. The
entrepreneurial school relies on the experience and knowledge of the entrepreneur
and it is trusted that the leader is able to create a future vision.
In studies about small and medium-sized enterprises, we may find the following
common characteristics: a) flexibility, b) quick adaption to changes, and c) leaps and
sudden changes are supported by relatively simple processes, finally d) simpler change
management. The majority of the small and medium-sized enterprises is growth-
oriented. It is required so by the business context and economic – technological
development, but the growth may also be generated by the entrepreneur’s hunger for
success that drives the organization lead by him towards continuous growth (Snaith &
Walker, 2002).
The entrepreneurial strategic school says that the possible escape route is the right
vision. However, what is a right vision like? Harvard professors Bennis and Namus
(1996, p.90) put an emphasis on the role of vision in their book The Strategies for
Taking Charge: „ A vision is a target that beckons... Note also that a vision always refers
to a future state, a condition that does not presently exist and never existed before.
With a vision, the leader provides the all-important bridge from the present to the
future of the organization”.
It is often said that a leader is obsessed by this or that, but is it really the case? Let us
think about that again! It may be the vision that brings success and growth.
Many believe that a vision compensates for the uncertainties of planning. They say a
goal is required, one that we can achieve and by that, a company can survive or can be
saved. In the 80’s in the United States, each large company suddenly started to create a
future vision that is good enough to be considered as strategy or vision. Today a good
slogan is no longer sufficient.
That approach originates performance goals from the vision of the entrepreneur, so
the creation of strategy will only be a semi-conscious process. As a result, the strategic
vision remains flexible, easy to shape and it becomes conscious during the process.
420 Strategica 2016
Likewise, the organization remains flexible and easy to shape, it reacts to the leader’s
instructions with ease (Papp, 2006).
If there is a vision, the enterprise can step on the designated route and it can create the
processes (the change can happen) that serve their interests. By that, it will be able to
set up measurable performance goals that, by formulating a system of goals ensure
successfully, viable business in the long run.
How can we define the vision? In the strategic concepts of small and medium-sized
enterprises, goals and tasks are often mixed up. For example, let us put the following
questions:
- Is there any defined goal that I can only achieve in the long term?
- Have I planned the tasks that make me achieve those goals?
- Do I observe and control if those tasks are completed?
- Can the defined goals still be reached after completing those tasks?
The questions attempt to handle the problems arising, they separate goals from
changes needed to achieve goals and they refer to their measurability. SME leaders
usually give the following answers:
- “Yes, next year we will install a new machine, by which we can increase production
…”
- “We want a new webshop, we will see how it works, we trust it will!”
As shown, terms are mixed up, it is not clear what a goal or a task is. Behind the above
sentences, leaders tend to see tasks: a license is needed; a machine has to be installed;
users need to be trained; the web developer has to be called; the wording of the
webshop needs to be created. Those are all tasks and goals, along which a company can
become successful. If analyzed from another perspective: we have purchased an
expensive machine that will stand still in the workshop or we have paid for a web shop
that will bring us no new orders.
The problem is, therefore, complex: there is no vision or strategy, but long-term
business decisions are made. It is not the machine that should be looked at, but a
workshop performing well. It is not the webshop that is important, but the system that
generates new orders and customers.
Want’s change model
The well-structured process of changes can be ensured by a complex model that is
close to the practice. Therefore Want’s change model has been selected for the
research, as the author himself acted as a management consultant and such
experiences can be found in the structure of the model too (Farkas, 2013).
Jerome Want’s (1995) change cycle model (Figure 1) shows, when certain types of
changes are necessary to an organization, what areas the changes affect, and what
strategies are available for change makers. The two major life cycle phases of the
organizations are the development phase (rising phase). It consists of two parts:
determination of self-image and standardization. At the end of the first part, the
business concept is organized into a unit (synthesis), so there is an easily identifiable
organization that develops in an integral way and steps into the second phase, the
Management and Leadership 421
development phase, the standardization. In that phase the characteristics created
become general or, we may say conscious, a human resource system is set up, as well
as work atmosphere and the organizational culture develops continuously. The author
identifies two separate parts in the change phase of the organization (declining phase):
disagreement and alienation. The various factors including the need for change move
the organization over the peak of the curve with ease. There is almost no moment
when the organization is ideal, but it is strengthened by the law of the early schools of
organizational theories: the organization will maintain its least probable status (von
Bertalaffy, 1979). As we move down along the curve, problems become more and more
complex and they bring bigger and bigger changes into the organization’s life. It is
worthwhile to take a closer look at the two phases of the change.
Figure 1. Want’s change model (Want, 1995, p.73)
In the disagreement phase, the change of certain processes or the creation of new
visions is possible without jeopardizing the existence of the organization. In SMEs
flexibility, dynamic changes and sudden leaps (to be considered as the ability to
innovate) can significantly affect companies’ lives. A small enterprise can easily reach
the bottom of the declining phase, even through one or two decisions. At that point, the
alienation together with complete disharmony of goals and consequences of decisions
threaten the mere existence of SMEs. Obviously, the organizational culture may simply
vary, or, given the relations of the model, even the joint change of the operational
strategy and the organizational culture may occur.
The model synthesizes the potential versions of organizational changes well and it
provides guidelines in the preposition phase what change indicators or changes
consequences we should examine.
It is important to emphasize that we do not wish to criticize the model, we only use it
as a framework for the analysis part of the research.
The research followed up the operations of Hungarian small and medium-sized
enterprises for 1-2-3 years. We conducted analysis on the basis of related business
cases searching for the Want characteristics of change management.
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Some result of the business cases
The objective of the research is to paraphrase a change management model that
understands and synthesizes the successful change management practice of SMEs. The
basic proposition of the research concept is the detailed elaboration of the dilemmas
described in the Introduction, the description of the behavior and tools of flourishing
small businesses and especially their leaders. It is intended to explain the methods and
characteristics of the daily routine of the flexibility often referred to, the ability to
adapt and the uniqueness.
Lots of SMEs including numerous family businesses show unsatisfactory operational
patterns if we wish to prove their success via management models, but they have
survived the crisis and they still manufacture and sell. The research aims to reveal the
features that enable those companies to remain going concerns in the long run.
In the first step of the research, we compare the findings of consulting projects
concerning two local small businesses with the Want model just presented. On that
basis, we evaluate their behavior. The concept will then be refined and it may be
decided whether other models should be involved. Afterward, the sampling will be
extended (Farkas, 2013).
Change management practices of small and medium-sized enterprises
Change is a natural part of SMEs’ lives, the corollary of growth, on the other hand, the
desire to meet market demands is also inspiring. In one of my previous studies
(Kurucz, 2014) the characteristics of the change flow were presented, the main points
are listed below:
- The permanent (continuous) presence of changes in the organization – the company
lives in a change flow.
- The overlap between change projects – several change projects need to be managed
at the same time.
- The effect mechanisms of changes co-relate – the result is impossible to plan.
- The changes affect a significant part of the organization’s operations – they are by no
means incremental.
- During changes, the principle of flexibility and “there is always a better way” should
be followed.
- Changes mean sudden leaps in terms of growth and development – few gradual
improvements.
- Due to sudden leaps, sudden behavior changes are required, it is a unique
phenomenon that is difficult to manage.
The sudden occurrence of changes and their congestion challenge a small organization
theoretically too, as administrative and management capacities are limited. Still, there
are companies coping with changes, we may assume they have a strong survival
instinct and their own “secret” tools.
There is one research topic we may highlight and that is the ability to decrypt plans
quickly (Kollár & Kollárné, 2014). Decryption is a technical term often used in
information technology in relation to engineering, but the method of design approach
Management and Leadership 423
has already incorporated it into the vocabulary of successful business models. How can
an SME rapidly and efficiently apply decryption? (Kollár, 2014).
We present two examples how companies can manage changes successfully.
Case studies (2 companies)
The leading idea of the research has come from the observation and cooperation with
two Hungarian SMEs; due to contractual obligations, we are not allowed to name the
subject companies. The intensive growth of the machinery company observed in 2012-
2013 and the analysis of the management’s daily challenges stressed out the need of
change management on a daily basis. A number of lessons are emerging through an IT
company we have been observing since January 2014 about the development of
strategic thinking and the behavior of an SME in change (perhaps crisis) situation.
Change management of the machinery company
The first company employs about 50 people, it is managed by the Hungarian owner,
who is the CEO itself. Their annual sales now reach HUF 1 billion. The enterprise
produces custom-made machines in the Balaton region.
The company has a large capacity of design engineering and their manufacturing
process is technology-intensive. Custom-made machine manufacturers produce spare
parts, assemble finished products and commission machinery like the subject
company. They also have a cutting workshop. They have several subcontractors to
extend their capacity. For some metalworking processes, they rely on outside
technological support (e.g. heat treatment).
In 2012, the enterprise had only 25 employees working in a workshop half the size of
the current plant. To describe the change management we highlight 3 major changes in
the company’s life and we draw the conclusions.
The most important change was the introduction of the corporate governance (ERP –
Enterprise Resource Planning) software. The project was started using tender funds.
They had no IT specialist, so they involved an IT company. They faced numerous
problems, as the company was quite unprepared (if preparing for such is possible at
all). During the introduction phase, they started to use software modules step by step,
the change of corporate processes was carried out in parallel. First invoicing, then
inventory, later the whole finances were handled by the software.
Employees had to learn the use of the software and they had to redistribute their tasks
in view of software functions. In the next stage the company’s main process, project
handling was reviewed, and a tailor-made software module was ordered. The
engineer’s team struggled with testing and had major issues with administration and
data recording. It was unsatisfactory in terms of software use, the support of processes
and for the company’s engineers too. It was nearly a crisis that needed a response
when the processes were redefined with massive CEO support.
The next change was urged by the congestion of design engineers. Design engineering
and project management could not be combined. There were employees who chose to
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become project managers and left problematic professional tasks and there were some
who remained engineers and specialists with no responsibilities to hold the project
together. Both led to dramatic fall in customer satisfaction. The management decided:
there will be individual sales and project manager positions and both will be separated
from the engineers’ tasks. A new sales specialist was hired. With him, the complete
project management process needed to be configured.
The third significant change was brought by the radical increase of the organization’s
size. Due to the high-quality services of the company, sales and orders skyrocketed. To
overcome capacity issues the enterprise hired an additional workforce. The number of
staff increased from 25 to 48 within a year. Doubling the workforce resulted in
management problems. The CEO could not find the right tools to maintain morale and
good work atmosphere in a company with increased staff number. That caused a
substantial change in the CEO’s behavior, but also employees felt the difference in
communication and their position within the company.
The next figure presents a summary of the changes, at the same time it classifies
changes on the basis of the Want model.
Figure 2. The change projects of the machinery company
Change management of the IT company
The IT company (Second company) has Hungarian shareholders, their annual sales
amount to HUF 1,1 billion and the company’s seat is located in Central Hungary. The
company employs 60-70 full-time employees and further about 40 subcontractors
work for the enterprise as consultants and software developers. In terms of
operations, a company with 110 people is examined.
The company specializes in the development and introduction of IT systems, they rank
as a medium-sized company in their sector. The company also implements major
public procurement projects. When describing change management we will analyze
changes in the management and organization of the company in the recent 3 years.
Management and Leadership 425
The company had been managed by an owner – CEO until 2011. It is not a rare
phenomenon in the IT world that a company led by a charismatic manager grows and
reaches a point, where the manager becomes an obstacle to all further development.
There are not only causes related to his thinking and personality, but obviously, he also
has limited capacities and may be unable to cope with all corporate issues. That is
exactly what happened to the second company.
In the period of one-person management, the company manager decided on his own.
For that, he required quick and comprehensive information. Financial and human
resources management supported him, but information processes could not develop to
a system. Every time tailor-made individual solutions were made. The lessons of such
situations formulated the complex process characterizing the company.
Capacities are completely exploited that way, but there are lots of useless (non-value-
producing) activities that lead to wasteful business operations and bad work
atmosphere. Congestion and stress were parts of the employees’ lives.
The manager was congested too, as he admitted, he wanted to escape from that
situation. Long leaves and postponed decisions led to decreasing market performance.
The company started to shrink. Several loss-making projects were undertaken.
Recognizing such projects should have been essential, however, financial control was
also lacking. Acting as a manager and supervising the daily operation of the company
was already congesting when the company employed 60-70 people.
As the first major change, he promoted two of his colleagues and delegated
development and consultancy managerial tasks. The company received a major order
and a project manager was required. The new administration and resource planning
managers were appointed. Yet, market rejuvenation was still not guaranteed for the
company.
One fruitful project could not ensure long-term survival. The appointed managers had
a hard time finding their positions in the organization. They were selected for those
positions based on their professional competence and existing processes and tasks
remained unchanged. Nevertheless, the repositioning of the new managers inside the
organization did not occur.
The market needed innovation (product and market) and higher-quality delivery. To
solve those problems – and bearing in mind his desire to escape - the owner / CEO
decided to involve specialists from outside the company.
Two new managers arrived at the enterprise, both of them former executives at
multinational companies. One of them was responsible for innovation and
management, the other one for delivery. Within 3 months, a management team of 5
people was set up. Management and strategic concepts remained unclear for all
including the owner.
Sector and professional competencies were known and functional areas also worked in
the company. The forthcoming years (2012-2013) gave proof of that, as sales increased
and new projects were introduced, but a common direction was missing.
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As a next step, they intended to evolve a planning process, in order to create at least
annual operative plans (sales, costs of operation, project management) that can
comprise objectives. For that, they turned to an external consultant.
The construction got a new direction during the planning workshop, as the managers
could not name integral objectives being in harmony with each other. Therefore, an
operative plan with precise figures was impossible to set up. The first phase of the
consultant’s job was to define strategy.
Expectations and thoughts about the company’s future vision and key areas needed to
be formally described for managers. Consequently, stating the mission, identifying
strategic directions, and formulating strategic objectives were necessary.
There was no performance control, so a KPI system needed to be developed.
Changes required quick and expressed interventions. Upon the strategic consultancy
project and as a result of a one-year cooperation the following changes occurred:
- Formulating integrated future vision and mission
- Preparing uniform wrote strategy
- Rethinking tasks of management (including the change of a manager)
- Preparing new organizational structure
- Setting up a management control system (KPI)
- Setting up processes for strategy making and control (strategic reviews)
- Setting up business processes matching the strategic goals.
During that period, the company started restructuring various areas, as they arrived at
a milestone. The next figure presents a summary of those changes and it classifies
them on the basis of the Want’s model.
Figure 3. The change projects of the IT company
Management and Leadership 427
Conclusions
The review of the change project of two companies was illuminating in terms of
identifying some elements of changes and it also provided results in comparison with
Want’s change model.
Let us see first what conclusions we can draw on the basis of the chosen model. With
regards to categories, we may say that changes were overwhelmingly changes in
operations and basic changes. The conversion of some business processes became a
daily routine in companies’ lives and, as a matter of course, it also affected other
functions and processes.
The other main feature is the appearance of a line of basic changes that made
companies deeply rethink their value systems, dreams, and missions. As a result,
radically new behavior patterns and organizational structures arise within unusually
short periods. Amongst changes disagreement and alienation categories occur.
The next figure (Figure 4) shows that also corporate construction and changes leave
out changes related to strategic and control policies.
Figure 4. Classifying SME changes on the basis of Want’s model
Changes in orientation are not typical. They are left out from the cycle. At this stage, we
are unable to define precisely the causes, but we may list some of them.
As strategic processes are “invisible” at SMEs, the change of strategy is not taken into
account either. Without a formal strategy, the rethinking strategy does not seem like a
task to be completed.
At companies of this size, there are no control mechanisms. The leader of the company
(often an owner-CEO) centralizes decisions on his own. He does not ask for other
opinions. Consequently, there are no formal processes for decision making. Decision
preparation is impermanent and there are ad hoc solutions. The proportion of
analyzing – planning methods is small, intuitive considerations are more common.
Even with the lack of systemized strategic thoughts, SMEs are viable and they employ
substantial resources to successfully execute changes. We may think that the
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permanent state and stability of control mechanisms are the foundation of a business
facing the challenge of change flow (Kurucz, 2014). After analyzing enterprises, we
have to admit that success probably comes from incoherency and imperfections of the
system. Having a look at the conclusions, we may say that instead of strategic issues we
have to concentrate on change management issues, through them we can guide back
SMEs to proper strategic management.
To conclude, through the phenomenon of change flow (Kurucz, 2014) small and
medium-sized enterprises spend their everyday lives amongst permanent changes.
Disorganization and undercapitalization are major disadvantages when they have to
maintain their competitiveness. Through changes, they always aim for higher quality
and increased profits. A characteristic of small companies is the lack of strategic
thinking, but they attempt to operate along strong visions. Identifying the right
direction of changes is set further back by the inadequate definition of objectives, still,
there is evidence for certain qualities that help those companies survive.
SMEs examined by Want’s change model show that companies predominantly face
changes in operations and in several cases, they decide about basic changes.
On the whole, SMEs – usually in an unconscious way - support their long-term business
operations by managing changes, however, the management of changes influencing
strategy remain out of consideration. In other words, in SMEs’ lives strategic
management and change management do not consciously co-relate.
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Want, H.J. (1995). Managing Radical Changes. New York: John Wiley & Sons.
Management and Leadership 429
WEBSITE MODEL USED FOR EMPLOYEE RECRUITMENT
Mirela-Catrinel VOICU
West University of Timisoara
4 Vasile Pârvan Blvd., 300223 Timisoara, Romania
mirela.voicu@e-uvt.ro
Abstract. In this paper, we focus on the importance of an online environment, used in
employee recruitment activities. We present our website, using questionnaires, which
help employers to select candidates for a job. The questionnaires allow us to detect the
candidate qualification, personality and knowledge level. Before a first offline interview,
we can make an online pre-selection. A pre-selection model, can include different stages,
such as the following: an online questionnaire concerning professional qualification (for
example, we can't recruit any person on an engineering job; he/she must have a certain
level of engineering education); an online test which can confirm the knowledge level of
the candidate; and one or more surveys on candidate personality. After each online
test/questionnaire, we have to do some evaluations. The next step is to take into
consideration only the candidates, which satisfy job requirements. Valuable online
questionnaires containing significant questions must be implemented using specialists (in
human resource, business, psychology, etc.). Only using adequate questions can we obtain
good selection results. Using the online environment and some filters, we can know the
candidate’s profile very well before the first interview, training, year of working, etc.,
where, in general, many employers come across various surprises. The online
environment allows us to detect candidates that are really close to the desired profile. In
this way, we can be sure that during the first face-to-face interview we meet only suitable
candidates.
Keywords: human resources; employee recruitment activities; website; mobile browser.
Introduction
Over the past years, IT technologies have seen a powerful development greatly
affecting many of the ways in which we work. Cloud computing technologies, mobile
technologies, and new web technologies have brought many changes in our everyday
behavior. Via the Internet, with the help of cloud computing technologies, we can use
infrastructure, software, and platforms whenever we want, wherever we want and in
whatever quantity we want. We can store our data in a cloud and use accounts on the
Internet, we can access them from any place of the world. In addition, depending on
the applications, we can access our data from different types of devices. Mobile
technologies are currently at the center of IT developers’ attention. The best
smartphones models already have computer capabilities; via Bluetooth, they can be
connected to keyboards, computer mice, video projectors or other devices. This is very
important for those who travel a lot and want to have as little technology to carry with
them as possible. The Internet is evolving and many fields of activity (including work)
are becoming increasingly pronounced every day. All IT developments affect many
other areas, which some years ago were held almost independent by the IT
technologies.
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The human resource is the most important resource for a company. Recruitment is not
the only step in evaluating this resource, but it is the first, and one of the most
important. If for example, we know not to employ an introvert in customer
relationship positions or an extrovert in isolated places, we find that the life can be
beautiful for both the employee and employer.
In this paper, we are interested in presenting how new technologies can help in
recruitment activities. We make the website implementation using PHP code and
MySQL database. For the design, we use Bootstrap - the most popular HTML, CSSS, and
JavaScript framework, which is responsive and can be used very well from a desktop
computer or from a mobile phone browser. The website has a login part for candidates.
Inside the website account, the prospective candidates respond to different tests and
quizzes. For the test and quiz implementation, we use a dynamical question tool, using
checkboxes and radio button components. In addition, our website provides data
analysis tools, in order to detect the best candidates for a certain job position.
On human resource recruitment
When we initiate a recruitment activity, we must consider some specialists:
professional people from the job scientific area, from human resources, and
psychologists. A professional person can determine if a candidate has the necessary
competence for a certain job position. If you test a candidate and the results are
satisfying, considering his studies and qualifications, you can make a decision about
the candidate.
Even if this is the most important aspect, it is not the only one. The people are
different, and generally, it is a bad idea to try to change them. Many people have strong
personalities, some features you like, and other you do not like. As an employer, it is a
good idea to get a general overview of the prospective employee’s personality, before
hiring.
Using questionnaires, for example, we can detect the candidate’s personality and
temperament. From Hedges (1993), we find that the basic characteristics of
personalities are the following: extroversion (E) and introversion (I); sensing (S) and
intuition functions (N); thinking (T) and feeling (F) functions; judging (J) and
perceiving (P) functions. For example, the Idealists have NF temperaments (intuition,
feelings). The NF temperament includes these types and their symbolic names: ENFJ –
Teachers; INFJ – Counselors, ENFP – Champions; INFP – Healers. In the book
mentioned above, we find all temperament types, starting from the main
characteristics of personalities and making different combinations. Using online
questionnaires, and adequate questions we can detect the personality type of our
candidates.
In this paper, we present a website model used for recruitment. This website model
uses questionnaires to detect the candidate personality. However, at this point we have
to point out that the success of candidate selection is not given by the website
implementation only; it is also strongly influenced by the questionnaires’ content. At
this step, you must consider psychology specialist which can formulate the questions.
If the questions are not relevant, the results cannot lead to a good candidate selection.
Management and Leadership 431
The website helps you by replacing a big part of the human activity. It can be helpful if
we specify the right context. Hedge’s book (1993) is an example, but the way in which
we formulate different questions is a completely independent problem from the
website’s implementation.
Many companies and firms have different tools aimed at recruitment on their websites.
Some of them have only contact forms or small parts dedicated to recruitment, other
firms include in their website more evaluated components used for recruitment.
However, if today these recruitment components are not used massively on company
websites, the following years will definitely see some changes in this area. Another
important observation is that the way in which we can formulate these components of
recruitments can be very varied. These modes also reflect the vision of the employer.
Even if in this paper we talk only about the recruitment, in the following years, human
resources departments around the world, will have stored in databases more
information on the professional evolutions of their employees over careers. At that
time, the online recruitment will be a component integrated into a whole system on
employees and their evolutions inside the company.
In the following section, we propose a website model, which can be used by small
firms, but also by big companies.
Website model
In the first stage of our website presentation, we talk about questionnaires and tests
formulation. Each personality questionnaire and each professional quiz consist of a set
of questions. Now, we would like to present some details on these questions.
From the IT perspective, the ways in which we formulate questionnaires and quizzes
can be varied. However, based on existing models (existing personality questionnaires
and professional tests), we propose the scheme presented in Figure 1.
Figure 1. Personality questions and responses
In a personality questionnaire, questions can be posed in the different ways: i) For a
certain question, we can have two possible responses: true or false, where the
432 Strategica 2016
respondents choose one answer. We score each response (true and false) with 1 or 0,
depending on the situation (see Q2 and Q3 in Figure 1). ii) For a certain question, we
can have zero, one, or a possible response, where the respondent chooses a single
answer, and we score each response with a certain value (see Q1 in Figure 1).
In the cases i) and ii) we add all the question points. In addition, other types of
questions can be formulated in personality questionnaires (e.g. for a certain question
we can have two or more possible responses, where the respondents choose a
different number of responses), but the two types, presented above, are the most
common. For the types i) and ii) we use radio buttons HTML components, but if we
choose other types of questions, we may need to use another kind of components. In
addition, we would like to point out that each type of question requires different types
of code implementation.
From Figure 1 we can observe that using only the i) and ii) question types, we can use
a single table (Personality Responses) for all questions of all personality questionnaires.
If we choose other question types in the database, we may have to change the structure
of the tables from the Figure 1. For professional quizzes, we can also formulate a lot of
question types and many scoring possibilities. Nevertheless, the real problem is the
candidate’s evaluation. One common way to formulate online quizzes is the following:
to use questions with zero, one or more correct answers and giving the candidate the
highest score if all responses to a single question were correct, and 0 if they were not.
For the question Q1 in Figure 2, we must use checkboxes HTML components, and for
the questions Q2, and Q3 we must use radio buttons HTML components. These
observations are important from an IT viewpoint in order to facilitate the website
construction.
Figure 2. Professional questions and responses
For each test or questionnaire we select a set of questions from a database, we provide
a test description and interpretation. If for a professional test it is easy to formulate an
interpretation, we know very well that for a personality questionnaire, the
interpretations vary greatly, depending on the content of the questionnaire questions.
For this reason, in the database, we must store the complete interpretation for the test
results.
Management and Leadership 433
Now, we present how we introduce and display a job position on the website. For
proposing a job position on the website, we consider the following kind of information
job name, expiration date of the offer for the job position, employee responsibilities,
requirements, benefits, and other information. In Figure 3, we present the registration
form web page with its image on a desktop browser. In Figure 4 (the left image), we
have the image for the same information on a mobile browser. At this step, we must
observe that the website is responsive. Using these two figures, we can observe that
the representation is slightly different, but in each case, we can easily navigate inside
the web page. The actual trends in web development are to build responsive websites.
If you look on the internet, you can see that many of the oldest websites are not yet
responsive. However, all these must be reformulated (from the web design viewpoint),
to the responsive level. This is mandatory because the navigation on the Internet from
the small devices is in a continuous increase. Currently, the most popular framework
used for building responsive websites is Bootstrap. In addition, we have used it in the
web page presented in Figures 3 and 4.
After recording a job position in a database, we associate it some personality
questionnaires and professional tests. Their number is chosen by the employer, and
may vary from one job position to another. When we propose a job position, we
associate it some personality questionnaires and professional quizzes, which will be
completed by all the candidates who apply for this job position. When we add a job
position, it remains available among the offers on our website, until a set expiration
date. In this time, any visitor to the website can view all job positions (see Figure 4 –
the image from right) and associated information (see Figure 5).
In Figure 4, we display the name of all available job positions from the website. With a
click on a certain job position, like in Figure 5, we can obtain the full information about
this job position. In the page presented in Figure 5, we choose collapsible panels
(Bootstrap components).
Figure 3. Job registration – webpage desktop image
434 Strategica 2016
Figure 4. Job registration – web page mobile image; displaying job positions
For job position components (responsibilities, requirements, benefits, and other
information), initially, we can see only the titles. With a click on a title, the associated
information will be displayed. Of course, in order to display the information about the
job position, we can use different HTML or Bootstrap components. However, the
general idea is that displaying lengthy information can cause the navigation in the web
page to slow down, especially from mobile devices. If it is possible to show and hide
information, we facilitate the web page navigation.
With a click on the Apply now button (each job position has its own button), anyone
can apply for a certain job.
Figure 5. Displaying a job position
Management and Leadership 435
Figure 6. User registration and user data
At this step, we propose the following scenario: when someone applies for a job
position, we request only an email address. For this email address, the candidate must
be registered on our website. This registration can be made before or after the job
application.
Figure 7. View the candidates’ applications for a job position
We store the following information about the candidates: e-mail address, first name,
last name, date of birth (or year of birth), telephone number, address, city, CV (upload
a file), letter of intent, other information. Depending on the type of job, the candidate
436 Strategica 2016
can complete many other fields of information, e.g. data on completed studies
(education level, graduation year, name of school, specialization, grade of study years,
graduation exam), foreign languages (name of language, reading level, writing level,
conversation level), etc. If the employer is interested in certain aspects, such as the
following: if the candidate plays sport, if he is or no smoker, etc., then the employer
must add specific components in the candidate form. In order to easily analyze a list of
candidates which have applied for a certain position, it is a good idea to add more
fields in the candidate form. We can add how many such fields we want, and the topics
of these fields correspond to the employer’s curiosity about the candidate profile.
Maybe, for different positions, it is not important if the candidate is thin or fat, but in
certain cases, this thing may influence the candidate’s selection. However, no matter
how many fields are completed by the candidates, it will be a good idea to allow the
candidate to add information about him. In some cases, such information can make all
the difference in choosing candidates. This can be made by allowing the candidate to
upload files on the website (e.g. a CV file) or adding text components like other
information, etc.
We have the navigation bar, fixed at the top of the web page. In Figure 6, we can
observe that the navigation bar is too large on a small mobile screen. Bootstrap allows
us to use a button in the top right corner to display the navigation. This means that
people can apply for a job position, using a desktop or a handheld device.
When a candidate has registered on the website, for each job application, a set of
quizzes and tests will be available to him to be completed until a certain date. As an
employer, you can view information about the candidates. In Figure 7, we select a job
position, and we can view some candidates’ data. At this step, you can make many data
analyses about the candidates, considering the test and questionnaires results, and use
the personal data from their website profile. After this step, the employer can make a
selection of candidates, or he can apply additional tests only for a certain part of
important candidates. The employer can stop the filtering activity when he wants.
After all these steps, the most important candidates can be invited for a face-to-face
interview.
The website model presented above helps us eliminate the candidates that are not
appropriate for a certain position. The remaining candidates will be further assessed in
a face-to-face interview and testing.
Conclusion
The new technologies have changed the ways in which we develop our activity. A great
number of activities used to be independent of computers and today are aided greatly
by IT technologies.
Computers are intended to replace routine work, however, as was have seen in this
paper, specialists from various disciplines will formulate issues and interpret the data
analyses. In the following years, online recruitment will become more and more
present in activities of recruitments and will help small firms, and big companies
choose the best employees for certain positions. This helps the employer, but also the
employee.
Management and Leadership 437
We have presented a website model which uses Bootstrap framework for web design,
PHP and MySQL for code implementation, but we can use many other tools (other
programming languages, other databases relational or not, and other tools for web
design). In addition, as we have pointed in our paper, IT continues to evolve, and in the
following years, other modern tools will appear in order to build websites. This means
that for implementation the used technology is not that important (however, its level is
very significant), the models of websites and their contents are important.
References
Armstrong, M. (2012). A handbook of human resource management practice, 12th
edition. London: Kogan Page.
Bouchard, N. (2011). Gérer les personnalités difficiles: Préserver sa bonne humeur au
travail malgré les défauts des autres. Québec: Les Éditions Québec-Livres.
Ceballos, J. (2008). Java 2. Madrid: Ra-Ma.
Erl, T. (2013). Cloud Computing: Concepts, Technology & Architecture. New Jersey:
Prentice Hall.
Hedges, P. (1993). Understanding Your Personality. London: Sheldon Press.
Jamsa, K. (2012). Cloud Computing. Burlington: Jones & Bartlett Learning.
Kroeger, O., & Thuesen, J. (2013). Type Talk: The 16 Personality Types That Determine
How We Live, Love, and Work, 10th edition. New York: Dell Publishing.
Mathis, R., & Jackson, J. (2010). Human resource management, 10th edition. Mason:
South-Western Cengage Learning.
Meloni, J. (2003). Sams Teach Yourself PHP, MySQL and Apache All in One. Indianapolis:
Sams Publishing.
Spurlock, J. (2013). Bootstrap. Sebastopol: O'Reilly Media.
Voicu, M.C. (2011). Websites on Tourism. Internet programming with Java, C#, VB.NET
and PHP using Microsoft SQL Server and MySQL databases. Saarbrücken: Lambert
Academic Publishing.
Voicu, M.C. (2013). Using online questionnaires in the employee recruitment activity.
Procedia - Social and Behavioral Sciences, 124(1), 34-42.
438 Strategica 2016
CHALLENGING THE RESOURCE-BASED VIEW:
AN ANALYSIS OF THE RELATION BETWEEN THE BOARD OF DIRECTORS AND
PERFORMANCE
Ovidiu-Niculae BORDEAN
Babes-Bolyai University of Cluj-Napoca
58-60 Teodor Mihali St., Cluj-Napoca, Romania
ovidiu.bordean@econ.ubbcluj.ro
Anca BORZA
Babes-Bolyai University of Cluj-Napoca
58-60 Teodor Mihali St., Cluj-Napoca, Romania
anca.borza@econ.ubbcluj.ro
Abstract. The paper investigates the relation between board attributes, strategy and
company performance. This study strives to clarify the connection between several types
of board demographics, like size, age, female representation, non-executives, and CEO-
duality and corporate performance. The results are consistent with other studies
performed abroad and at the same time offer new theoretical and managerial
perspectives on the issues analyzed. Data used in the study was collected from 58 publicly
traded Romanian companies listed on the Bucharest Stock Exchange (BSE). Sample
companies are categorized into one the following industries: manufacturing,
pharmaceuticals, bank and insurance services, and retail. Data was drawn from
following sources: Annual Reports and Board of Directors Reports. Rumelt’s approach on
measuring corporate diversification was implied. As for company performance two types
of variables were used: the return on assets (ROA) and the return on equity (ROE). In
order to test our hypothesis, we used the SPSS software. The main analyses used in our
study were one-way ANOVA, independent t-test, Pearson correlation and regression
analysis. The findings offer some valuable insights into the decision of corporate
diversification at both theoretical and managerial level. According to our results size can
be an important element in companies’ decision to diversify. At the same time, non-
executive directors tend to influence positively the level of performance within the
analyzed companies.
Keywords: board of directors; company performance; corporate strategy; resource-
based view; competitive advantage.
Introduction
Company performance remains one of the major concerns of managers from both
developed and developing economies. Moreover, scholars had tried during the years to
explain what is augmenting the financial results of companies. There is a general belief
that once a company is able to capitalize on its competitive advantage, the higher
Management and Leadership 439
profits will start to appear. Proponents of the resource-based view (RBV) see the
human capital as one the companies’ resources that can turn the competitive
advantage into profits. The paper draws on the analysis of a particular stakeholder,
namely the members of board of directors and tries to answer several research
questions:
(1) What is the effect of the board of directors’ attributes on the company
performance?
(2) Does corporate diversification moderate the effect of the relationship between the
board of directors’ attributes and company performance?
The research is settled in an emerging economy; 58 publicly traded companies from
the Bucharest Stock Exchange have been included in the sample.
The paper is structured as follows. It starts with an overview of the theoretical
implications of the resource-based view of the firm on the creation of sustainable
competitive advantage. At the same time, it describes the importance of human capital
as the main predictor of greater company profitability. Next, the research methodology
is presented together with a description of the three statistical models that are tested.
After this, the main findings of the study are highlighted. The paper ends with a
discussion about the main contributions to the body of knowledge.
Theoretical background
According to some scholars, the resource-based view of the firm is seen to be one of
the most influential frameworks used within the strategic management field of study
(Barney, Wright & Ketchen, Jr., 2001). Moreover, it has been admitted as a new
paradigm for the strategic management field (Peteraf, 1993). The moment it became to
be adopted by theoreticians coincides with the emergence of several studies that
pointed out that firms are made of a bundle of resources which enables them to obtain
a competitive advantage (Barney, 1991; Rumelt, 1984). Within this theory, resources
play an important role not only in the development of strategies but also for the
achievement of greater profitability. As stated by resource-based view proponents, it is
no longer the case of some privileged market position to explain the success of a firm
(Porter, 1980), but rather the type of resources and the way in which they are handled
by the firms. Although the resource-based view is a rather new phenomenon
(Ambrosini, 2003), it is argued that it has its traces within the classic approach of
strategy formulation as it focuses on the strengths and weaknesses of firms (Andrews,
1971). Within this context, it is of great importance for managers to clearly establish
which resources are valuable and genuine sources of competitive advantage. The work
of Peteraf (1993) and Peteraf and Barney (2003) is essential in this respect as it
describes the keystones of any resource-generated strategy and it has to do with the
heterogeneity of resources (resources differ among firms) and the imperfect mobility
of resources (resources are not mobile across firms).
Practitioners have now a very useful and powerful tool that they can use in order to
assess the possibility of a resource to generate and sustain a competitive advantage
(Kozlenkova, Samaha & Palmatier, 2014). The VRIO framework allows for an appraisal
of firm’s resources by investigating four attributes: valuableness, rareness, imitability
and exploitability (Barney & Hersterly, 2012). A resource is valuable if it is able to
440 Strategica 2016
support the successful implementation of a strategy and unleash its potential towards
greater revenues. Simply exploiting a resource is not enough for achieving a
competitive advantage as there might be other firms doing the same thing. Thus, a
resource needs to be possessed by a small number of competing firms. Moreover, the
resource should be hard to imitate by the other competitors, meaning that it will be
costly for them to obtain it. Eventually, the resource has to be exploited by the
organization; this implies that the firm has the right procedures, policies, and
processes to deal with that resource (Barney & Clark, 2007).
It is worth distinguished between the tangible and intangible resources. Within
tangible resources, one could include plants, equipment, finances, and location,
whereas intangible resources refer to employees’ skills and motivation, patents and
copyrights and firms’ culture and reputation (Grant, 2008). Barney and Hersterly
(2012) identified four categories of resources that a firm might possess: physical,
financial, human and organizational. There is a general belief that intangible resources
are more likely to be the root of sustainable competitive advantage (Grant, 1996; Hitt
et al., 2001; Spender, 1996). The reason for this is that intangible resources normally
incorporate the knowledge that resides within the firm’s human capital. Knowledge
can be either explicit, that is the knowledge that can be easily articulated and
communicated, either tacit, that is the knowledge that is embedded in individual skills
and in firm’s culture (Nelson & Winter, 1982; Polanyi, 1966). The non-imitability
attribute of tacit knowledge makes it more valuable and more likely to lead to
competitive advantage (McEvily & Chakravarthy, 2002). Hence, the way in which
people are selected and attracted by firms will have an important role in the creation
of competitive advantage.
The link between human capital and performance has been widely documented within
the literature. There is enough evidence to support the crucial role that employees play
in the financial success of firms (Arthur, 1994; Dyer & Reeves, 1995; Guest, 1997;
Paauwe, 2009). However, very few studies addressed this link from the point of view
of a particular stakeholder, namely the board of directors. Board of directors is part of
the human capital dimension that is considered to have a remarkable influence on the
results of the firms. Within the corporate governance framework, board members are
said to have two functions: supervise and monitor top management on behalf of
shareholders and provide resources (Hillman & Dalziel, 2003; Monks & Minow, 1995).
A decisive concern over the past years was to assess the contribution of the board of
directors to the strategy process (Bordean, Crișan & Pop, 2012; Pearce & Zahra, 1992,
Pugliese et al., 2009). Even though the results are quite fuzzy, it is believed that the
role of the board of directors in strategic management is to carry out three basic tasks:
1) monitor, 2) evaluate and influence and 3) initiate and determine (Wheelen &
Hunger, 2012). According to the level of involvement within the strategy process, the
board of directors are classified either in five (Nadler, 2004) or even six categories
(Wheelen & Hunger, 2012) based on a continuum. Studies carried out on various types
of boards suggest that the most involved are board members in strategic management
tasks, the greater the financial performance will be (Judge & Zeithaml, 1992; Pearce &
Zahra, 1992).
The relationship between the board of directors and performance is well documented
within the corporate governance literature. Scholars tried to assess both the
observable (demographic) and the non-observable (cognitive) dimensions of boards.
Management and Leadership 441
Some examples of observable variables are gender, age, race, and ethnicity, whereas
examples of non-observable variables are knowledge, education, values and
personality characteristics (Erhardt, Werbel & Shrader, 2003). So far, studies that
focus on board of directors attributes and performance revealed contradictory results.
Some authors were able to determine positive effects that board of directors has over
performance within various contexts and backgrounds (Bantel, 1993; Simons & Pelled,
1999). On the other hand, there are still studies who point out towards a negative
relation that exists between boards of directors and company performance (Knight et
al., 1999; Hambrick, Cho & Chen, 1996). Zahra and Pearce (1989) proposed an
integrative model grounded in theory and empirical research that grouped boards
attributed into four dimensions: composition, characteristics, structure, and process.
Research methodology
The sample for this study is drawn from the companies listed on the Bucharest Stock
Exchange that act in various sectors. The reason for choosing such a sample has to do
with the availability of data provided by the listed companies that are required to
publish information about their activities throughout the year. The data was gathered
from the Annual Reports and from Board of Directors Reports. Even though, not all the
listed companies published these documents, so the final sample consisted of 58
publicly traded companies from Romania. Table 1 provides a summary of the main
characteristics of the firms included in the sample. Among the firms analyzed, 27.59%
were small and medium-sized enterprises, that is companies that employ less than 250
people; 17.24% were companies that had between 251-500 employees and the rest of
them had over 500 employees.
Table 1. Characteristics of sample firms
Characteristics Number Percentage
Size of firms
SMEs (1-2501 employees) 16 27.59
Large firms (251-500 employees 10 17.24
Extra large firms (>501employees) 32 55.17
Ownership
State-owned firms 10 17.24
Private-owned firms 48 82.76
Years of trade on BSE
Veteran firms (> 15 years) 30 51.72
Mature firms (between 11-14 years) 16 27.58
New entrant firms (<11 years) 12 20.70
One way of classifying firms according to the type of ownership refers to state-owned
and private-owned firms. Within the sample, the majority of firms were private-owned
(82.76%). Various studies highlight the direct effect of firm’s age upon knowledge
accumulation with respect to the business environment (Carroll & Harrison, 1998;
Glance, Hogg & Huberman, 1997; Lin & Hui, 1999). This variable is measured in
different ways, but the most used one is the number of years the firm activates on the
market. Considering the characteristics of the sample, we chose to use as a metric for
this variable the number of years firms are listed on the BSE; thus three groups of
firms evolved: (1) “veterans” that are listed for more than 15 years; (2) “mature” that
442 Strategica 2016
are listed on the stock exchange for a period that ranges between 11 and 15 years and
(3) “new entrants” that are listed for less than 11 years.
The variables included in the research are grouped into three categories: independent
variables, dependent variables and control variables. For this study, we focus on one
particular type of stakeholder of the firm, namely the board of directors. The
independent variables are connected to this stakeholder and refer to the following: the
size of the board, the age of board, the female representation, the non-executive
representatives and the CEO duality of the board. The dependent variables refer to the
level of performance of the firms within the sample, whereas the control variables are
the firms’ size and a number of years they are listed on the stock market. We also tried
to test the moderating effect of diversification strategy on the link between the board
of directors’ attributes and company performance. Table 2 summarizes how each
variable was constructed and measured.
Table 2. Variable construction and measurement
Variable Measurement
BOD_size Number of people sitting in the board of directors.
BOD_age Average age of people sitting in the board of directors.
BOD_female Percentage of females (Number of female members/Total
number of board members).
BOD_non_executives Percentage of board members without executive positions
(Number of board members without executive position/ Total
number of board members)
BOD_duality Measured as a dummy variable (1- if the chairman and CEO
are the same person, else - 0).
Firm_size Number of employees the firm has.
Firm_age Number of years the firm is listed on the BSE.
Strategy Measured based on Rumelt’s specialization ratio (Revenues of
the largest product-market/Total revenues)
Perform_ROA Return on assets (Net income/Total assets)
Perform_ROE Return on equity (Net income/Shareholders equity)
The analysis of data was done with SPSS 16.0. One of the first analyses implied was the
descriptive statistics for the variables included in the study; these results are
highlighted in Table 3. Next, the one-way ANOVA analysis was performed in order to
test if there are any significant differences between the various groups of firms with
respect to the board of directors’ attributes. Eventually, Pearson correlation and
regression analysis were performed to test the three models proposed within this
research:
Strategy = α + β1BOD_size + β2BOD_age + β3BOD_female + β4BOD_non_executives +
β5BOD_duality + β6Firm_size + β7Firm_age + ε
(1)
Perform_ROA = α + β1BOD_size + β2BOD_age + β3BOD_female + β4BOD_non_executives
+ β5BOD_duality + β6Strategy + β7Firm_size + β8Firm_age + ε (2)
Perform_ROE = α + β1BOD_size + β2BOD_age + β3BOD_female + β4BOD_non_executives
+ β5BOD_duality + β6Strategy + β7Firm_size + β8Firm_age + ε (3)
Management and Leadership 443
Findings
The boards included in the sample have between 2 and 11 members and the average
age of those people sitting on the board of directors is 50 years. Some of the boards do
not include any women within them and there was no board that had no members that
were not part of the executive board as well (see Table 3).
Table 3. Descriptive statistics
Variable N Minimum Maximum Mean Std.
deviation
Firm_size 58 26.00 22739.00 1454.00 3224.77
Firm_age 58 3.00 17.00 12.79 3.90
BOD_size 58 2.00 11.00 4.96 1.85
BOD_age 58 39.60 64.20 50.75 6.31
BOD_female 58 .00 .60 .13 .17
BOD_non_executives 58 .20 1.00 .84 .19
BOD_duality 58 .00 1.00 .41 .49
Strategy 58 26.71 100.00 72.76 23.24
Perform_ROA 58 -33.03 22.28 .25 9.15
Perform_ROE 58 -362.48 48.57 -12.66 64.9
The results of the ANOVA analysis showed that board of directors only differ between
the three groups of firms created using their size in terms of the number of people
sitting on the board of directors. The size of the board of directors is different for the
SMEs, large firms and extra large firms (p = 0.004). No significant differences between
older and newer firms had been found out with respect to how the board of directors is
structured for the firms in the sample.
Table 4. Results of ANOVA analysis for BOD attributes
Board of directors’ Firms’ attributes
attributes Firm_size Firm_age
F Sig. F Sig.
BOD_size 6.122 0.004 0.744 0.480
BOD_age 0.029 0.971 0.271 0.763
BOD_female 2.309 0.109 1.099 0.340
BOD_non_executives 0.334 0.717 0.029 0.971
BOD_duality 0.335 0.717 0.793 0.458
The results of the Tukey-post hoc are presented in Table 5 and reveal that main
differences are between extra large firms and SMEs (p = 0.011) and between extra
large firms and large firms (p = 0.034).
Table 5. Results of the Tukey post-hoc test
(I) (J) Mean Std. Sig.
Firm_size Firm_size Difference Error
(I-J)
Dependent SMEs Large firms .51250 .68810 .738
variable: Extra large firms -1.34375* .52265 .034
BOD_size Large firms SMEs -.51250 .68810 .738
Extra large firms -1.85625* .61841 .011
Extra large firms Large firms 1.34375* .52265 .034
SMEs 1.85625* .61841 .011
* The mean difference is significant at the 0.05 level
444 Strategica 2016
In order to test if there are significant differences between state-owned firms and
private-owned firms with respect to board structure, we used the independent t-test.
The results of this test are showed in Table 6. It was found out that the size of the
board of directors differs significantly for the firms where the state is the owner in
comparison to the firms that have private investors (p = 0.019).
Table 6. Results of the independent t-test
Board of directors’ Ownership structure
attributes State-owned firms Private-own firms
t Sig. (2-tailed) t Sig. (2-tailed)
BOD_size -2.410 0.019 -0.983 0.330
BOD_age 0.682 0.498 -0.976 0.333
BOD_female 0.136 0.893 0.416 0.679
BOD_non_executives -1.311 0.195 1.370 0.176
BOD_duality -0.989 0.327 0.013 0.990
The three models hypothesized for this study were tested using the regression analysis
and the results are presented in Table 7. In the first model that accounts for 15% of the
variation, the diversification strategy was regressed against the five variables defined
for the board of directors and the two control variables. The variable number of board
members is negatively and significantly linked to strategy (β = -4.888, p = 0.017). The
other board of directors’ variables do not have any significant impact on the
formulation of strategy. Model 2 accounts for only 9% of the variation and predicts the
influence of board attributes upon return on assets. It was found out that boards with
members that were not having any other executive positions within the firm perform
better (β = 13.637, p = 0.083). Eventually, Model 3 accounts for 12% of the variance
and predicts the impact of board attributes on another financial indicator, which is a
return on equity. In this case, the variable non-executive board members has even a
stronger influence on the financial results of the firms in comparison to the previous
model that was tested (β = 135.811, p = 0.014).
Table 7. Results of the regression analysis
Independent Model 1 Model 2 Model 3
variables Dependent Dependent Dependent
variable: Strategy variable: variable:
ROA ROE
Firm_size .001 9.097 .000
Firm_age .012 .148 .750
BOD_size -4.888* .361 .336
BOD_age .207 -.172 -.466
BOD_female -3.144 -.875 -23.751
BOD_non_executives 8.698 13.637** 135.811*
BOD_duality -3.284 3.486 30.136
Strategy .033 .035
R2 .15 .09 .12
F 1.277 .606 .886
* Statistically significant at less than .05 level
** Statistically significant at less than .10 level
The other variables pertaining to the board of directors did not reveal any influence on
the firms’ performance, nor did the control variable included within the three models
Management and Leadership 445
tested. Moreover, the level of diversification strategy implemented by firms does not
impact the level of performance.
Discussions and conclusions
The paper investigated the relation between the board of directors’ attributes and
strategy implementation and also the relationship between the board of directors’
attributes and firm performance on a sample of companies listed on the Bucharest
Stock Exchange. The way in which boards influence the strategy is still quite unclear as
a lot of studies performed within this framework failed to lead to a consensus in terms
strategy is shaped by board members. From a contextual point of view (Pugliese et al.,
2009), the present study falls under the input-output approach that assumes there is a
link between board composition and strategic outcomes, such as diversification,
innovation, mergers, and acquisitions. Findings suggest that the size of the board
impacts the diversification strategy; moreover, a negative association between a
number of people sitting on a board and diversification strategy was found. Previous
studies proved that the size of board may have a positive influence on the performance
of the companies, the main reason for considering so was that more people could
generate more intellectual knowledge that could be useful for the financial outcome of
the company (Dalton et al., 1998; Pearce & Zahra, 1992). However, the strategy making
process is time-consuming and any strategy is intended to be implemented on a long-
term base. Being able to reduce the time needed to formulate and implement the
strategy is an indicator of potential success for the company. Fewer people within a
board can represent a decrease in time for the decision-making process and
consequently this could lead to a better implementation of the strategy.
For measuring the performance of the companies, two financial indicators were used,
return on assets and return on equity. ROA shows how profitable a company is at using
its assets in order to generate earnings, whereas ROE measures a company’s
profitability by revealing how much profit a company generates with the money
shareholders have invested. The boards can comprise of members that have executive
functions within the company and also of members that do not an executive position.
According to the findings, boards with non-executive members positively influence the
financial results of the companies. This is consistent with other previous works
performed on board of directors (Bhagat & Bolton, 2008; Jackling & Johl, 2009;
Jermias, 2007). In this case, the non-executive members are seen as offering valuable
inputs as they contribute by increasing the general intellectual knowledge of the group
and leading to better decisions that are reflected in the financial outcomes of the
companies. The study supports the superiority of the resource-based view of the firm,
as human capital proves to be of great significance for the way in which the
competitive advantage is created.
The results presented are subject to some limitations that need to be taken into
consideration when interpreting the findings. First, it should be noted that the study
used a small sample of the companies listed on BSE. Secondly, the study addressed
only some of the board attributes that are reported in the literature as main
determinants of corporate performance. Thirdly, only the moderating effect of
diversification strategy was checked for the relation between board attributes and
performance. Future areas of research could focus on a larger sample of companies
446 Strategica 2016
and include other board of directors’ variables, such as a number of board meetings or
board leadership. Still, the paper contributes to the body of literature that describes
the link between boards and corporate performance in an emerging economy.
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Management and Leadership 449
COMMUNICATION CLIMATE, WORK LOCUS OF CONTROL AND
ORGANIZATIONAL COMMITMENT – RESULTS FROM AN
EXPLORATORY STUDY
Virgil GHEORGHE
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104 Bucharest, Romania
gheorghe.virgil@student.comunicare.ro
Abstract. The actual global economic competition entails considerable challenge in the
organizational life. There is an increased interest in identifying the main factors that
could predict organizational commitment and performance. The current study aims to
examine the relationship between communication climate, work locus of control and
various dimensions of organizational commitment such as affective, normative and
continuance commitment. Communication climate in an organization is a key
determinant of the effectiveness thereof, as it refers to the emotional level of a
relationship. In other words, it describes the way people feel about each other as they
carry out their daily activities. Work locus of control refers to the extent to which people
believe that they are in control of their lives, or to external factors such as chance and
powerful others, who are responsible for the events that influence their lives. The
organizational commitment is a manifest response to the work groups and the measure
of employee attachment towards the organization. It is directly related to the turnover
rates, absenteeism, tardiness and individual performance level, with significant impact on
the organizational efficiency. The focus of our study is of the variables which are due to
the direct impact on the behavior of an employee and on the orientation thereof towards
commitment being concentrated on communication climate and generalized perceived
control belief within the work groups. The study comprised 91 participants from both
public and private sector organizations in Romania. The attendants were invited to
answer the following questionnaires: Communication Climate Inventory (Costigan &
Schmiedler, 2004), Work Locus of Control Scale (Spector, 1988) and Organizational
Commitment (Meyer & Allen, 1997). The study has a cross-sectional and correlation
layout, all questionnaires being self-reported. The correlation analysis revealed that locus
of control showed a positive relationship with continuance commitment. The results
further demonstrate that supportive climate has a significant negative correlation with
affective commitment and normative commitment. The implications with regard to
theoretical research and organizational practice are also discussed. If the management
wishes to increase the organizational commitment, it is wise for it to pay particular
attention to the individual particularities and context of the work groups.
Keywords: organizational commitment; work locus of control; communication climate;
affective commitment; normative commitment; continuance commitment.
450 Strategica 2016
Introduction
The term communication climate refers to the emotional side of a relationship, which
does not mean a specific activity, but rather the way people feel about each other as
they carry out those activities (Adler, Rosenfeld, Proctor & Winder, 2009). In other
words, it is the way in which the people involved in a relationship or in specific context
feel about and treat each other.
As a component of organizational climate, communication climate, in terms of
employee interaction, is a factor that influences the quality of the work environment
and the effectiveness of the organizational functioning.
Gibb (1961) emphasizes the importance of employee interaction, especially the
attitude and behavior of managers in their interactions within organizations. He
identifies two poles in the climate of communication, defined as supportive and
defensive climate. The supportive climate encourages the subordinate, whereas the
defensive climate puts the individual on defend, reacting defensively to the words and
tone of the speaker in their interactions.
The organizations with supportive climate are characterized by work participation,
free and open exchange of information, and constructive conflict management. Within
organizations with defensive climates, the employees keep things to themselves, work
by taking care of their actions and have low morale (Costigan & Schmiedler, 2004).
Hence, the findings of this study reveal that the literature oriented towards the
examination of communication climate can be applied in an organizational context,
with effects on organizational commitment.
The term work locus of control refers, according to Spector (1988), the personal
behavioral tendency represents the extent to which individuals tend to attribute what
happens to them to internal factors (e.g. skills, efforts, perseverance) or to external
factors (e.g. chance, other people, divine intervention). Internality is the perception of
control that employees have over various outcomes in the workplace. An externality is
a perception that work outcomes are controlled by luck or by powerful others.
Rotter (1966) found that personalities who tend to be external are generally more
susceptible of and submissive to the direct influence of others. Personalities who tend
to be more internal are not as susceptible of and submissive to the influence of others.
Employee locus of control is important because it has been linked to a number of job
performance criteria. As work locus of control is thought to measure this generalized
perceived control belief in the workplace, it is important to understand the variability
of its impact on the dimensions of organizational commitment.
Organizational commitment can be defined as “the relative strength of an individual's
identification with and involvement in a particular organization” (Mowday, Steers &
Porter, 1979). It is a manifest response to the work groups and the measure of
employee attachment towards the organization. While the linkage between job
perception and employee commitment among organizations has been widely studied,
less attention has been paid to the effect of communication climate and work locus of
Management and Leadership 451
control, both directly on the organizational commitment. The low level of
organizational commitment has negative effects, such as increased turnover rates;
higher absenteeism and tardiness; poorer performance with a significant impact on
organizational efficiency (Meyer, Stanley, Herscovitch & Topolnytsky, 2002). Allen and
Meyer (1991) proposed three types of organizational commitment: continuance
commitment (cost), normative commitment (obligation), and affective commitment
(attachment).
Affective commitment (attachment) refers to a psychological attachment to the
organization (i.e., individuals stay with the organization because they want to). In
organizational commitment literature, the affective organizational commitment was
defined as the extent to which an employee identifies himself/herself with the
organization (Meyer, Allen & Smith, 1993).
Continuance commitment (cost) refers to costs associated with leaving the
organization and the perceived lack of alternatives (i.e., individuals stay with the
organization because they need to). Employees who are essentially bound to their
organization on the basis of continuance commitment stay in their jobs because they
feel that what they have invested in the organization (e.g., time, energy) would be
“lost” if they left their current employer or, because they assess their job options
outside the organization as being limited.
Normative commitment (obligation) refers to a perceived obligation to remain with
the organization (i.e., individuals stay with the organization because they feel they
should) (Coleman, 1999). Employees with a high level of normative commitment
believe they have the duty and responsibility to continue working for their current
employer.
These findings, taken as a whole, indicate the importance of accounting the individual
and the contextual factors that might influence organizational performance. Given the
importance of organizational commitment as an organizational outcome variable, the
investigation of the relationship between work locus of control, communication
climate in the workplace and commitment creates a practical implication by a
managerially actionable factor in the effectiveness of organizational functioning. Thus,
the organizational commitment dimensions depend on the form of the relationship
between communication climate and work locus of control. Specifically, we propose
the following hypotheses:
The following hypotheses are formulated:
H1. The higher work locus of control will be positively correlated with the high level of
continuance organizational commitment;
H2. The supportive organizational climate will be positively correlated with the high
level of organizational commitment.
452 Strategica 2016
Methods
Sample and data collection procedure. Measures.
The study participants received an e-mail from the researcher with a short description
of the study and with the request to cooperate. Absolute anonymity was stressed and
guaranteed in the introduction. Via a link at the bottom of the e-mail, the employees
accessed the online questionnaire. The respondents had 14 days to reply. To increase
the response, a reminder was sent out a week later.
All variables used in this study were assessed through online surveys using self-report
measures. In order to measure the participants’ Communication Climate parameters,
Work locus of Control Scale and Organizational Commitment, we adapted three
existing scales that have been well established and have consistently demonstrated
good psychometric properties in a number of studies.
Communication climate inventory (CCI) developed by Costigan and Schmiedler, (2004)
was used in the present study. This instrument operationalized the notions of
defensive and supportive communication climates. The 36 questions of the CCI are
presented in a Likert response format, with three factors corresponding to each of the
12 factors.
The design of the CCI is such that the lower the score, the higher the degree to which
either climate (defensiveness or supportiveness) exists. The lowest possible score on
either dimension is 18, while the highest possible score is 90.Tests of CCI's internal
reliability show coefficients ranging from .80 to .97, which are generally considered to
be very satisfactory (Costigan & Schmiedler, 2004).
Spector (1988) operationalized the concept of locus of control in a work environment
by developing the work locus of control scale (WLCS) for job-related work settings
such as promotions, salary increases, and disciplinary measures. Items are rated on a
six-point Likert response scale. A higher global score represents a more external locus
of control.
According to the international norms (Spector, 2006), the estimate of the Romanian
WLCS is 46.5. The scores higher than this level show an external locus of control,
whereas the scores lower than 46.5 indicate an internal locus of control. An internal
control orientation refers to the belief that the outcomes are a result of the purposive
action, whereas an external control orientation reflects the belief that chance, luck,
fate, or powerful others are responsible for the outcomes.
Findings indicate that differences exist between those reporting internal control
orientations and those reporting external control orientations. Results indicated that
people who report an internal control orientation also reported higher levels of
relational satisfaction with coworkers, top management, and perceived influence.
Externals report significantly lower levels of relational satisfaction with supervisors
than internals. Cronbach's α for the overall locus of control scale shows coefficients
ranging from .71 to .89 (Chen & Wang, 2006).
Management and Leadership 453
The three dimensions of organizational commitment (affective commitment,
normative commitment and continuance commitment) were assessed using Meyer et
al. questionnaire (1993). A six-item scale measures affective commitment (e.g. I feel a
strong sense of belonging to my organization). The normative commitment scale
includes six items (e.g. I would feel guilty if I left my organization now). The measure of
continuance commitment contains six items (e.g. I believe that I have too few options
to consider leaving this organization).
Each item was linked to a six-point Likert response scale ranging from “Strongly
disagree” (1) to “Strongly agree” (6). The scores for two of the items measuring
affective commitment should be reversed.
The three-component model of commitment is important because, although all three
forms of commitment decrease the likelihood of individuals leaving an organization,
there are different antecedents and consequences associated with each form of
commitment. Consequently, managers should be aware of the manner in which their
employees are committed to the organization and should attempt to foster affective
commitment in their employees (Coleman, Irving & Cooper, 1999). Coefficient alpha
values ranged from .77 to .88 for affective commitment (ACS), from .65 to .86 for
normative commitment (NCS) and from .69 to.84 for continuance commitment (CCS)
(Fields, 2002).
Demographic information and recoding
Thus, in order to achieve a deeper understanding of the relations between work locus
of control, communication climate and organizational commitment, the present study
assesses this moderating effect by considering the three forms of organizational
commitment (affective, normative and continuance commitment), and by using a
measure of locus of control adapted to a work setting. The present study has a cross-
sectional and correlation layout, all questionnaires being self-reported.
The study comprised 91 participants: 30 males and 61 females aged between 24 and
61 years old, coming from both public (33 participants) and private sector(58
participants) organizations in Romania, with ages of work structured in three clusters
(below 6 years – 34 participants, between 7 and 15 years – 38 participants, above 15
years – 19 participants).
454 Strategica 2016
Results
Preliminary analyses
Table 1 presents the descriptive statistics (means and standard deviations) of the
variables.
Table 1. Descriptive statistics Work locus of control, Communication climate,
Organizational commitment (N = 91)
Mean Std. Deviation
WLCS_total_score 63.84 9.50
Defensive climate 57.68 11.41
Supportive climate 44.06 10.70
Affective commitment 27.19 7.05
Normative commitment 24.41 8.67
Continuance commitment 27.19 7.32
Aggregate commitment 78.81 19.02
These findings reflect inter-correlations among work locus of control and the three
dimensions of organizational commitment. The correlation between work locus of
control and continuance commitment was r=0.293, p<0.01, N=91. People reporting a
higher external locus of control orientation reported significantly higher levels of
continuance commitment.
The aim of this study was also to examine the relationship between organizational
commitment and the two components of communication climate calculated by
Pearson’s correlations. The supportive climate was negatively correlated with
organizational commitment (r=-.442, p<.01, N=91). The results indicate that an
organizational supportive climate reported significantly higher levels of organizational
commitment. On the other hand, there were no statistically significant relationships
between defensive communication climate and organizational commitment.
Table 2 presents the comparison between gender demographic values and
organizational commitment (affective, normative), and also between gender and
communication climate (defensive). Non-significant relationships have been found
between gender and work locus of control, continuance commitment, and supportive
climate.
The mean of affective commitment was significantly higher for males (M=30.933,
SD=6.684) than for females (M=25.36, SD=6.52). The mean of normative commitment
was significantly higher for males (M=27.96, SD=8.64) than for females (M=22.67,
SD=8.21).The mean of defensive climate was significantly higher for females (M=59.40,
SD=11.23) than for males (M=54.16, SD=11.13).
Management and Leadership 455
Table 2. Group statistics: demographic comparative analysis Gender vs. Organizational
Commitment and Communication climate (N = 91)
Gender N Mean Std. Deviation
Affective commitment Male 30 30.93 6.68
Female 61 25.36 6.52
Normative commitment Male 30 27.96 8.64
Female 61 22.67 8.21
Defensive climate Male 30 54.16 11.13
Female 61 59.40 11.23
This study considers that the secondary educational stage covers middle school, high
school, vocational studies, whilst the tertiary educational stage includes college and
postgraduate education.
Table 3 presents the comparison between educational background as demographic
values and work locus of control, organizational commitment (affective, normative and
continuance) and communication climate (defensive and supportive).
The mean of work locus of control was significantly higher for the secondary stage
(M=68.06, SD=5.895) than for tertiary stage (M=62.80, SD=9.96). The mean of
organizational commitment was significantly higher for the secondary stage
(M=100.72, SD=12.456) than for tertiary stage (M=73.41, SD=16.31). The mean of
defensive climate was significantly higher for the tertiary stage (M=58.54, SD=12.41)
than for secondary stage (M=54.16, SD=4.47). The mean of supportive climate was
significantly higher for the tertiary stage (M=45.00, SD=11.32) than for secondary
stage (M=40.27, SD=6.63).
Table 3. Group statistics: Demographic comparative analysis Educational level vs. Work locus
of control, Organizational Commitment and Communication climate (N = 91)
Educational stage N Mean Std. Deviation
Secondary stage 18 68.06 5.89
WLCS_total_score
Tertiary stage 73 62.80 9.96
Secondary stage 18 100.72 12.45
Commitment_total_scores
Tertiary stage 73 73.41 16.31
Secondary stage 18 54.16 4.47
Defensive climate
Tertiary stage 73 58.54 12.41
Secondary stage 18 40.27 6.63
Supportive climate
Tertiary stage 73 45.00 11.32
The demographic variables are also considered. The results indicated that secondary
educational level expressed external locus of control and higher commitment scores.
The tertiary educational stage had higher defensive and supportive communication
climate and reported believing they might be able to influence their organizational
environment.
456 Strategica 2016
Discussion
The present study was designed to explore the relationship between work locus of
control, communication climate (supportive climate and defensive climate) and
organizational commitment (affective, normative and continuance commitment).
Further, the impact of different demographic variables (including gender and
education) on organizational communication climate was also explored.
The significant positive correlation between work locus of control and continuance
commitment shows us, in other words, that external LOC is associated with high
continuance commitment. An external locus of control reveals the perception that
work outcomes are controlled by luck or faith, whereas continuance commitment
involves recognition of the costs associated with leaving the organization. These
findings confirm the expected outcomes of hypothesis H1, which stated that work
locus of control is positively correlated with continuance organizational commitment.
The results drive similar conclusions to those of other studies, that the employees with
more external locus of control are more likely to have high continuance commitment.
These results help us to further understand the complex relationship between
individual differences and psychological reactions to a specific change (Chen & Wang,
2006; Munir & Sajid, 2010).
The second hypothesis predicted that higher supportive organizational climate will
report higher levels of organizational commitment. The results of the present research
proved the stated hypothesis H2. Organizations with supportive environments
encourage employee participation, open exchange of information, alternatives and
solutions in the problem-solving process. Supportive communication climate is
composed of professionalism, empathy, spontaneity, problem orientation and
description (Costigan & Schmiedler, 2004).
On the other hand, based on the general model of workplace commitment, Herscovitch
and Meyer (2002) defined commitment to a change as “a force (mindset) that binds an
individual to a course of action deemed necessary for the successful implementation of
a change initiative”. In other words, “employees can feel bound to support a change
because they want to, they have to, and/or they ought to” (Herscovitch & Meyer, 2002,
p.475).
Therefore, a supportive organizational climate conducts to a low commitment to
change. In terms of managerial implications, the findings suggest that managers should
try to adjust the supportive climate work conditions by using different methods in
order to obtain the desired commitment behaviors related to the work group target, to
determine what the employee is committed to or what the employee is within the
organization.
The impact of demographic variables (gender, educational background) and of the type
of organization variable was assessed in the context of communication climate, work
locus of control and organizational commitment. The results of the present research
also provided further support for general predictors of organizational commitment.
This was accomplished by examining the comparison of the three factors of
organizational commitment with gender. The mean of affective and normative
commitment was significantly higher for males than the mean of affective commitment
Management and Leadership 457
for females. Moreover, the defensive climate was significantly higher for females than
the defensive climate for males.
The job model attributes the gender differences in work commitment to differences in
the workplace constraints and opportunities of men and women. A possible reason for
women’s higher level of defensive work commitment and for men’s higher level of
affective and normative work commitment to change is the motivational job
characteristics: working women often need to set work and family demands, often lack
support from their organizations and have fewer opportunities on the labor market.
The defensive climate, where the employees keep things to themselves and work by
taking care of their actions draws more specific conditions for women to adapt. These
pertinent work environment conditions affect the employees’ job and organizational
commitment.
Non-significant relationships have been found between gender and work locus of
control, continuance commitment, and supportive climate. The present findings
revealed that educational background, clustered in two stages (secondary and
tertiary), can predict a relevance with work locus of control, as a specific personality
variable.
Locus of control is influenced by the educational atmosphere, enjoyed a higher level of
control, displayed a higher level of motivation on their jobs and grasped more
opportunities for mutual learning and professional exchange. Therefore, managers
should incorporate the educational levels of workers in a selection process to put
quality people in leadership positions; consider selecting potential employees who are
considered internals. (Tillman, Smith &Tillman, 2010).
Organizational commitment, considered as the strength of the individual’s
identification with and involvement in a specific organization, comprises the belief in
and acceptance of organizational scope and values, and a desire to continue as a
membership in the organization. The educational background results compared with
organizational commitment denote a higher relationship with the secondary stage
than with the tertiary stage. Gibb (1961) stated that employees are influenced by the
communication climate in the organization.
Findings indicate that reports of organizational climate dimensions are indeed related
to the educational background. More specifically, the individuals who reported a
tertiary stage of studies identified a defensive organizational climate, whereas the
respondents who reported a secondary school background identified a supportive
climate. In terms of education, significant differences existed as regards
communication climate: educated people were found to work in a defensive climate by
displaying evaluation, control, strategy, neutrality, superiority, certainty, while
individuals with secondary education displayed equality, spontaneity and problem
orientation to concrete (Gibb, 1961).
Currently, employees expect a fair and humane working environment and want to be
treated as an individual. In order to develop a durable organizational environment and
to avoid conflicts, the work groups should mainly develop their managers in terms of
relevant communication and organizational commitment skills.
458 Strategica 2016
Conclusion and implications
This research carries implications to objectively explore the communication climate,
work locus of control and organizational commitment. It can be used as a valuable
guide to identify the patterns of the dimensions implied in the commitment in the
organization's environment and it guides managers as to how to adapt the assessment
and development programs to create a climate of trust, spontaneity, and empathy.
Work locus of control, as the individual's tendency to believe that people control
events in life or that such control resides elsewhere, and the communication climate
dimensions will enhance the degree of employee participation in the organizational
processes and their level of identification with the organization. The results are
important because they bring to light a notable landmark of the management studies.
The authors acknowledge that these dimensions couldn’t simply influence the
organizational commitment without taking into consideration the many different
contexts of an organizational relationship.
The study has a cross-sectional and correlation layout, all questionnaires being self-
reported. This could be a potential limitation because the cross-sectional data usually
does not reflect any ongoing transformations that might affect the relationships
between variables, and it cannot provide causal explanations.
It is also important to acknowledge that the conclusions presented in this thesis are
based on a limited number of participants from the Romanian work environment, the
sampling being made from different organization types and dimensions. The gender
distribution of the study sample emphasizes the resultant implications. The sampling
process ended in the distribution of 61 female and 30 male participants, therefore
possible reasons for this uneven distribution between male and female participants
should be acknowledged, along with how this uneven distribution might influence the
study findings.
The results of the present study should be further confirmed in the process of finding
other types of organizational change, as well as within other organizations.
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460 Strategica 2016
AN EXPLORATORY STUDY REGARDING THE MODERATING ROLE OF
INCIVILITY BETWEEN OCCUPATIONAL STRESS AND
COUNTERPRODUCTIVE WORK BEHAVIOR
Iulian OJOG
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104 Bucharest, Romania
ojogiulian@yahoo.com
Dan Florin STĂNESCU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104 Bucharest, Romania
dan.stanescu@comunicare.ro
Abstract. Lack of civility within the organization leads to serious damage to the
interpersonal relationship among employees and can be a strong predictor for
developing more severe forms of violence, resulting in low productivity, low job
satisfaction, financial loss, as well as an increase in health insurance. Uncivillity in work
environment is a concept of antisocial behavior recently introduced, characterized by
disrespect for others, recklessness, impoliteness, lack of manners and social isolation. The
current research included 65 participants (32 male and 33 female), private sector
employees, aged between 23 and 59 years (M = 34.43, SD = 8.53), who were invited to
answer to the following questionnaires: a) Stress scales. The Stress scale combine four
subscales - ICAWS - Interpersonal Conflict at Work Scale; OCS - Organizational
Constraints Scale; QWI - Quantitative Workload Inventory and PSI - Physical Symptoms
Inventory; b) Counterproductive Work Behavior Checklist. The CWB scale contains five
subscales: abuse, production deviance, sabotage, theft, and withdrawal; c) Uncivil
Workplace Behavior Scale. The results showed significant positive correlations between
occupational stress and counterproductive work behavior (r = .56; p = .000), and between
occupational stress and incivillity (r = .31; p = .001). At the same time, we have found a
significant positive correlation between counterproductive work behavior and incivillity
(r = .39; p = .000). Concerning gender differences in performing counterproductive work
behaviors, the mean scores of CWB reported by males (M = 45, SD = 8.89) were
significantly higher (t (63) = 2.55, p = .014) than those reported by female participants
(M = 40.4; SD = 4.91). Regarding the main objective of the research, the moderation
analysis certifies that uncivillity of the employees performed within the organizational
environment influences the relationship between occupational stress and
counterproductive work behavior: ΔR2 = 132 It, F (1, 61) = 16.280, p <.000. In conclusion,
this research revealed that impolite, rude behavior oriented toward other members of the
organization, associated with increased occupational stress, will only hasten and
accentuate the emergence of counterproductive work behaviors.
Keywords: incivility; occupational stress; counterproductive work behavior.
Management and Leadership 461
Introduction
In the last decade, organizational researchers have examined counterproductive work
behavior (CWB), defined as behaviors that harm or intends to harm organizations and
their stakeholders, within the occupational stress framework. Other studies (e.g., Fox,
Spector & Miles, 2001) were focused mainly on CWB as an emotion-based strain
response to job stressors. The current one, aim to investigate the moderating effect of
uncivillity on the relationship between occupational stress and counterproductive
work behavior.
Jex and Beehr (1991) mentioned that a job stressor is represented by any situation
that requires an adaptive response on the part of an employee. A job stressor can be
anything an employee might interpret as being threatening to his or her psychological
or physical well-being (Spector, 2002). Job stressors are events or environmental
conditions, intense or frequent enough, demanding certain types of physiological and
psychosocial reactions from the individual (Elliot & Eisdorfer, 1982).
Le Blanc, De Jonge and Schaufeli (2000) mentioned that stimuli having the potential to
generate stress within an organization could be divided into four main categories: job
content, working conditions, employment conditions and workplace social network.
The first category compile work stressors such as monotony of work, complexity of
work, increased responsibility, work overload or underload. In the working conditions,
category one can find the following stressors: poor working conditions, toxic
substances, lack of hygiene, and lack of protection. The third category, employment
conditions list stressors such as working hours, low payment and job insecurity. In the
last category, social network stressors the authors mentioned: poor management, low
social support, and discrimination.
Jex and Beehr (1991) defined the employee responses to those stressors as being a job
strain. Those responses can be psychological, physical, or behavioral in nature (Beehr,
1995; Jex, 2002; Jex & Beehr, 1991). According to Spector and Jex (1998), and Spector
and Fox (2002) job stressors represent events that are interpreted by the employees
as threats to well-being and result in negative emotional reactions, such as anger,
anxiety or depression. The most known psychological strains are depression, anxiety,
and dissatisfaction. In the area of physical reactions, one can find symptoms such as
headaches, insomnia, cardiovascular or skeletomuscular illnesses. Behavioral
responses include absenteeism, poor performance or poor job quality, and turnover.
Some of the most common psychological effects are burnout, boredom, fatigue, anxiety,
frustration etc. Physiological effects include various pains, ulcers, hormonal
imbalances, heart disease etc. Behavioral effects are usually: abuse of harmful or toxic
substances (tobacco, alcohol, and drugs), accidents, family problems, or effects in the
organizational area such as decreased work performance, absenteeism, accidents, and
turnover.
Spector (1998) and Spector and Fox (2002) developed a job stress/emotion/CWB
model that suggests CWB is an emotion-based response to stressors at work. Negative
emotions, such as anger and anxiety, have been shown to mediate the relationship
between CWB and job stressors (Fox et al., 2001). Lee (2003) examined the effect of
conflict source (supervisor vs. coworker) on CWB target (organizational vs. personal).
462 Strategica 2016
She found some support that negative emotions mediated the relationship between
conflict with one’s supervisor and organizational CWB.
Counterproductive work behavior (CWB) represents a set of volitional acts that can be
aimed at the organization itself or people in the organization (e.g., supervisor,
coworker, subordinates) and either harm or are carried out with the explicit intention
to harm (Spector & Fox, 2005).
Counterproductive work behaviors include, among others: abusive behavior, physical
and verbal aggression, poor performance, sabotage, theft, absenteeism, delays etc.
Those behaviors are produced intentionally by employees and have a negative effect
on the organization, employees or other stakeholders. The typology of these behaviors
includes both behaviors oriented against organization and behaviors oriented against
individuals. Behaviors that are oriented against organization can range from minor
forms of counterproductive behavior such as excessive breaks, early departure or the
slow pace of work, to serious forms such as sabotage or theft. At the same time,
counterproductive behaviors aimed at employees can range from relatively minor
ones such as gossip, favoritism to actions with more serious implications such as
sexual harassment, abuse, and bullying.
Studies on the dimensionality of CWB have shown that it can be divided into five
categories: abuse against others, sabotage, production deviance, theft, and withdrawal
(Spector et al., 2006). Abuse against others represents harmful behaviors that can be
psychological or physical in nature. Examples are making nasty comments about
coworkers or undermining a coworker’s ability to work effectively (Spector et al.,
2006). Sabotage affects physical property belonging to the organization (i.e., defacing
or destroying the physical workplace), whereas production deviance represents
behaviors that destroy the work process (e.g., purposefully performing one’s work
incorrectly) (Spector et al., 2006). Moreover, production deviance is generally passive
in nature, whereas sabotage is more active. Theft can be considered a form of
aggression against the organization (Neuman & Baron, 1997) even though it usually
results from economic need, injustice, or job dissatisfaction (Mustaine & Tewksbury,
2002). Withdrawal consists of behaviors that reduce the amount of time one works to
less than what the organization requires (e.g., leaving early or taking longer breaks
than allowed; Spector et al., 2006).
Bennett and Robinson (2001) mentioned three main trends in the analysis of
predictors of counterproductive behavior, namely: deviance as a reaction to the
employee experiences; deviance as a reflection of employees’ personality; deviance as
an adaptation to social context. In the first category, deviance as a reaction to the
employee experiences, we meet research on theft, vandalism, aggression in response
to frustration, lack of control or perception of injustice, unfairness, which apparently is
one of the strongest predictors of counterproductive work behavior.
The second category, deviance as a reflection of employees’ personality claims that
different dimensions of personality might explain some of the variances of deviant
behavior (Robinson & Greenberg, 1998). In the same direction, the research conducted
by Shin, Ashton and Lee (2001) showed that certain personality dimensions predict
various types of organizational deviance. Deviance oriented against the organization is
thus associated with low conscientiousness and interpersonal deviance is associated
with low levels of extraversion and agreeability.
Management and Leadership 463
Colbert, Mount, Witt, Harter and Barrick (2004) showed that emotional stability,
conscientiousness and agreeability moderates the relationship between perceived
work situation and counterproductive behaviors. Other research conducted by Douglas
and Martinko (2001) showed that anger, attributional style, negative affectivity, and
other personality factors explain a large proportion of the variance of work bullying.
The third category - deviance as an adaptation to the social context – is based on the
assumption that by definition, organizational deviance involves violation of
organizational norms, but it seems that peer pressure, specific norms and regulations
actually supporting the deviance are essential for it to occur. A primary predictor of
antisocial behavior at work is the degree of peers’ involvement in similar behavior
(Robinson & O'Leary-Kelly, 1998). Mikulay, Neuman, and Finkelstein (2001) showed
that one factor that may be considered as a predictor of counterproductive behavior is
represented by the lack of loyalty of employees to the organization.
In a study of abusive behavior in the workplace, Keashly, Trott, and MacLean (1994)
found that all participants had experienced at least one incident of nonsexual,
nonphysical abusive behavior. They have also reported that the supervisors, followed
by peers and subordinates, represented the most common perpetrator. In addition,
they have reported a higher degree of impact by abuse from supervisors than from
coworkers (Keashly, Trott & MacLean, 2002). Similarly, in their study of employee
aggression, Greenberg and Barling (1999) found that more than 70% of participants
reported having psychologically aggressed at least once. Gossiping about or arguing
with the target were the most frequent forms of psychological aggression.
Regarding the behavioral reactions to CWB, LeBlanc and Kelloway (2002) mentioned
turnover and decrements in communication and performance. Work-related
psychological reactions are job dissatisfaction, work-to-family conflict, family-to-work
conflict, and decrements in normative commitment, and affective commitment
(Tepper, 2000). The psychological reactions to CWB were studied by many researchers
who found that CWB leads to feelings of depression and anxiety, emotional exhaustion,
life dissatisfaction (Tepper, 2000), decrements in emotional well-being (LeBlanc &
Kelloway, 2002; Schat & Kelloway, 2000).
Incivility at work is a relatively new concept of antisocial behavior introduced in
organizational psychology studies, characterized by disrespect for others, rudeness,
disrespect, boorishness etc. (Blau & Andersson, 2005; Johnson & Invik, 2001).
Incivility refers to relatively mild, insensitive, rude, or discourteous behavior toward
others at work (Pearson, Andersson & Wegner, 2001). Incivility and interpersonal
conflict involve perceptions of interpersonal mistreatment, but the perceived (benign,
benevolent, or malevolent) intent of the instigator varies with each. For example, the
underlying motive of incivility is ambiguous, whereas there is clear hostile intent with
interpersonal conflict (Penney & Spector, 2005).
The literature described deviations at work as a continuum starting from incivility to
aggression or violence (Vickers, 2006), incivility being defined as low-intensity
deviance (Cortina, Magley, Williams & Langhout, 2001). Even if the unpolite behavior
was defined as low intensity, it should not be confused with a minor problem (Vickers,
2006). Impoliteness deserves serious attention because of its harmful effects on both
individuals and organizations. Previous findings showed that organizational and
464 Strategica 2016
individual performance, as well as employee productivity, health, labor attitudes and
interpersonal relationships in the organizational environment were negatively affected
by the lack of civility in the workplace (Neuman & Baron, 1997; Pearson, Anderson &
Wegner, 2001).
Anderson and Pearson (1999, p.457) define work incivility as “... low-intensity deviant
behavior with ambiguous intent to harm the target, in violation of workplace norms for
mutual respect”. They also pointed out that witnessing incivility could encourage a
kind of incivility spiral so that behavior increasingly rude might become a defining
characteristic of organizational climate. Examples of incivility are speaking to someone
in a demeaning manner; treating someone like a child; publicly undermining
someone’s credibility; excluding someone from a meeting; not greeting someone; and
cutting someone off when they are speaking (Pearson, Andersson & Porath, 2000).
Hartman (1996) argues that every organization highlights certain norms of
interpersonal respect and a shared understanding of morality and ways to behavior
within the community. Any type of rude behavior violates these rules, transforming
rudeness into a specific variety of workplace deviance, defined by Robinson and
Bennett (1997, p.5) such as ”a voluntary behavior that violates the organization's rules
and by this threatening the organizational and individual well-being”.
A more detailed account of the concept of incivility at work is encountered in the work
of Lim, Cortina, and Magley (2008). They say that there are three important
characteristics that differentiate incivility of other forms of mistreatment at work:
violating the norms of respect, intensity, and ambiguity in the intent to harm. In
conclusion, the lack of civility in the workplace can lead to impaired interpersonal
relationships and can be a strong predictor for developing more severe forms of
violence (Lim & Cortina, 2005).
Reactions to incivility include effects at the individual level, such as stress and
decrements in psychological well-being and satisfaction (Lim & Cortina, 2005), and
effects at the organizational level such as low performance, job dissatisfaction and
intent to quit (Lim & Cortina, 2005). Participants in Pearson, Andersson, and Porath
(2000) study of workplace incivility reported specific ways of coping with incivility,
starting from committing intentional acts such as reducing efforts at work (25%) and
reducing one’s organizational commitment (33%), to intentionally avoiding the
instigator (25%), whereas some others decreased the amount of time spent at work.
Twelve percent of participants actually quit their jobs in response to uncivil acts.
Furthermore, 5% of respondents stole property from the instigator as retaliation for
unfair treatment, whereas another 5% stole property from the organization itself
(Pearson et al., 2001). One has also to be aware that a work incivility target may also
direct his aggression towards the organization. Penney (2002) examined the
relationship between incivility and CWB, using both self- and peer-reports, discovering
that both self- and peer-reports of incivility were related to self-report of CWB.
Management and Leadership 465
Methods
Given those previous empirical findings, it was expected that the relationship between
occupational stress and CWB to be moderated by workplace incivility. Therefore, the
following hypothesis was proposed:
Hypothesis 1: there will be a positive correlation between stress subscales and CWB
Hypothesis 2: there will be a positive correlation between CBW and incivility
Hypothesis 2: incivility will moderate the relation between stress and CWB.
The employee (self) survey included measures of job stress, incivility and
counterproductive work behaviors (CWB). Participants were private sector employees,
aged between 23 and 59 years (M = 34.43, SD = 8.53), 32 male and 33 female. They
were invited to fill in a set of questionnaires compiling the following measures: Stress
scales (Spector & Jex, 1998) which combine four subscales - ICAWS - Interpersonal
Conflict at Work Scale; OCS - Organizational Constraints Scale; QWI - Quantitative
Workload Inventory and PSI - Physical Symptoms Inventory; Counterproductive Work
Behavior Checklist (Spector et al., 2006). The CWB scale contains five subscales: abuse,
production deviance, sabotage, theft and withdrawal; and Uncivil Workplace Behavior
Scale (Martin & Hine, 2005).
Interpersonal Conflict at Work Scale, ICAWS, is a four-item scale, who asks about how
well the respondent gets along with others at work, specifically getting into arguments
with others and how often others act nasty to the respondent. High scores represent
frequent conflicts with others, with a possible range from 4 to 20. Internal consistency
reliability was reported by Spector and Jex (1998) to average .74. Organizational
Constraints Scale, OCS, was based on the work of Peters and O'Connor (1980) who
listed 11 areas of constraints, e.g., faulty equipment, or incomplete information.
Respondents are asked to indicate how often it is difficult or impossible to do his or
her job because of each item. High scores represent high levels of constraints, with a
possible range of scores from 11 to 55. Quantitative Workload Inventory, QWI, is a 5-
item scale designed to assess the amount or quantity of work in a job, as opposed to
qualitative workload, which is the difficulty of the work. Respondents are asked to
indicate how often each statement occurs. High scores represent a high level of
workload, with a possible range from 5 to 25. Spector and Jex (1998) reported an
average internal consistency of .82. Physical Symptoms Inventory, PSI, assess the
physical, somatic health symptoms thought by stress researchers to be associated with
psychological distress. Each is a condition/state about which a person would likely be
aware, e.g., headache. Respondents are asked to indicate for each symptom if they did
not have it, had it, or saw a doctor for it in the past 30 days.
Counterproductive work behavior was measured using the 32-item Counterproductive
Work Behavior Checklist (CWB-C) (Spector et al., 2006), that produces 5 subscales of
abuse (harmful and nasty behaviors that affect other people), production deviance
(purposely doing the job incorrectly or allowing errors to occur), sabotage (destroying
the physical environment), theft, and withdrawal (avoiding work through being absent
or late). Respondents indicate how often they engage in specific behaviors on the job.
Response options range from 1 (never) to 5 (every day), with high scores representing
the higher incidence of CWB.
The Uncivil Workplace Behavior Questionnaire, UWBQ, (Martin & Hine, 2005) is a 17-
466 Strategica 2016
item multidimensional instrument assessing four different facets of workplace
incivility: gossiping, hostility, exclusionary behavior, and privacy invasion. Participants
were asked to rate how often they experienced particular uncivil workplace behavior
(from their supervisors or co-workers) on a 5-point Likert scale ranging from Never
(1) to Very Often (5). Higher scores indicated experience of more frequent uncivil
behaviors from supervisor or co-workers. Martin and Hine (2005) reported that
coefficient alpha for the UWBQ was .92.
Results
Descriptive statistics for the measures are presented in Table 1 and the inter-
correlations among the measures are displayed in Table 2 and 3. The distribution of
scores on each of the measures appeared to be normal, with the exception of CWB total
score, production deviance, sabotage, theft, withdrawal, organizational constraints and
privacy invasion. For these three measures, the distribution of scores was positively
skewed.
Table 1. Descriptive statistics for measures
N Mean Std. Deviation
Interpersonal Conflict at Work 65 8.49 1.786
Organizational Constraints 65 19.85 5.922
Quantitative Workload 65 13.69 4.633
Physical Symptoms 65 5.52 3.593
Stress total score 65 11.8885 2.71247
Abuse 65 1.4496 .31145
Production deviance 65 1.2821 .40065
Sabotage 65 1.0769 .17450
Theft 65 1.1108 .30214
Withdrawal 65 1.9269 .63542
CWB total score 65 42.6769 7.46472
Exclusionary behavior 65 2.0031 .50805
Gossiping 65 1.7923 .61646
Privacy invasion 65 1.3462 .45862
Hostility 65 1.7269 .47747
UWB total score 65 1.7171 .36088
Valid N (listwise) 65
Significant correlations were found between stress (composite score) and CWB
(r=.564, p<.01), and also between the majority of subscales of each measure.
Therefore, support was found for the first hypothesis. On one hand, the CWB
composite score is positively correlated with Organizational Constraints (r=.446,
p<.01), Quantitative Workload (r=.355, p<.01) and Physical Symptoms (r=.417, p<.01),
but not with Interpersonal Conflict at Work. On the other hand, the Stress composite
score positively correlate with Abuse (r=.467, p<.01), Production deviance (r=.321,
p<.01), Theft (r=.507, p<.01) and Withdrawal (r=.451, p<.01), but not with Sabotage.
Table 2. Correlation matrix between stress and CWB
Production CWB
Abuse deviance Theft Withdrawal total
Organizational Pearson Correl. .379** .253* .357** .378** .446**
Constraints Sig. (2-tailed) .002 .042 .003 .002 .000
Management and Leadership 467
Quantitative Pearson Correl. .265* .199 .427** .291* .355**
Workload Sig. (2-tailed) .033 .112 .000 .019 .004
Physical Pearson Correl. .299* .189 .375** .369** .417**
Symptoms Sig. (2-tailed) .016 .132 .002 .002 .001
Stress total Pearson Correl. .467** .321** .507** .451** .564**
Sig. (2-tailed) .000 .009 .000 .000 .000
Support was also found for the second hypothesis. Self-reported incivility was
positively correlated with self-reported CWB (r=.395, p<.01). The sub-scales
correlations were significant only for the relations between Incivility and Abuse
(r=.466, p<.01) and for CWB composite score with Gossiping (r=.437, p<.01), and
Hostility (r=.299, p<.05).
Table 3. Correlation matrix between Incivility and CWB
Abuse Sabotage CWB total
Gossiping Pearson Correl. .569** .272* .437**
Sig. (2-tailed) .000 .028 .000
Hostility Pearson Correl. .404** .240 .299*
Sig. (2-tailed) .001 .054 .015
UWB total Pearson Correl. .466** .161 .395**
Sig. (2-tailed) .000 .201 .001
Finally, we have tested the hypothesis that predicted that incivility would moderate
the relation between stress and CWB. The regression analyses (Table 4, 5 and 6) was
conducted by entering the incivility and stress in the first step followed by the
moderator, product term in the second step – stress X incivility. The outcome of the
moderated regression for the relation between stress and CWB is significant, incivility
being a strong moderator of the CWB outcome (∆R2=3566.215 F (3, 64) = 20.638, p <
0.01).
Table 4. ANOVA
Model Sum of Squares df Mean Square F Sig.
1 Regression 1324.050 2 662.025 18.306 .000b
Residual 2242.165 62 36.164
Total 3566.215 64
2 Regression 1796.383 3 598.794 20.638 .000c
Residual 1769.832 61 29.014
Total 3566.215 64
a. Dependent Variable: CWB total
b. Predictors: (Constant), UWB total, stress total
c. Predictors: (Constant), UWB total, stress total, stress x UWB
Table 5. Regression model summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .609a .371 .351 6.01365
2 .710b .504 .479 5.38643
a. Predictors: (Constant), UWB total, stress total;
b. (Constant), UWB total, stress total, stress x UWB
Table 6. Regression analysis - Beta coefficients
Unstandardized Coefficients Standardized Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 18.109 4.310 4.202 .000
Stress total 1.344 .292 .488 4.604 .000
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UWB total 5.003 2.194 .242 2.280 .026
2 (Constant) 88.770 17.933 4.950 .000
Stress total -4.855 1.559 -1.764 -3.115 .003
UWB total -39.283 11.150 -1.899 -3.523 .001
Stress x UWB 3.817 .946 3.581 4.035 .000
a. Dependent Variable: CWB total
Conclusions
One of the most consistent findings of presents research and mirrored by the previous
empirical studies presented in the occupational stress literature is the positive
relationship between experienced stressors and CWB. In the current study, all of the
correlations between job stressors (Organizational Constraints, Quantitative
Workload, and Physical Symptoms) and CWB were significant and positive.
Moreover, the correlation between Incivility and CWB was significant. However, the
results using Incivility and CWB subscales were mixed. Incivility was not significantly
related to Production deviance, Theft or Withdrawal subscales of CWB; although, CWB
was significantly related to Gossiping and Hostility scales of Incivility.
The results of the current study are mirrored by those obtained by other studies,
showing a clear link between occupational stressors and CWB, and provide further
support for Spector’s (1998) model of job stress and CWB. Moreover, they support the
findings reported by Andersson and Pearson’s (1999) about the incivility spiral and
suggest that employees being targets of workplace incivility may increase the
likelihood of engaging in CWB. The incivility spiral implies that being subjected to
incivility could provoke an individual to engage in retaliatory acts, such as CWB.
It is clear that the relationship between incivility and CWB deserved further attention,
being a process which can easily become a loop function - the CWB performed by one
individual (especially in the interpersonal area) could be experienced by others as
incivility or other job strain which may increase their propensity to engage in CWB.
Despite several shortcomings, such as relatively small sample size and self-reported
measures, the present research brought to light some interesting findings. Workplace
incivility, a variable that has only recently received attention in organizational
research, showed a strong relationship with CWB as well as with occupational stress.
In conclusion, experiencing workplace incivility in addition to other job stressors
appears to increase the likelihood that an individual will engage in CWB.
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Management and Leadership 471
A WORKDAY – FROM AN ENERGETIC POINT OF VIEW
Andronicus Michael TORP
Polytechnic University of Bucharest
313 Splaiul Independentei, Sector 6, 060042 Bucharest, Romania
andronicus.torp@icloud.com
Corina CIPU
Polytechnic University of Bucharest
313 Splaiul Independentei, Sector 6, 060042 Bucharest, Romania
corinac71@yahoo.com
Anca Alexandra PURCAREA
Polytechnic University of Bucharest
313 Splaiul Independentei, Sector 6, 060042 Bucharest, Romania
apurcarea@gmail.com
Abstract. This article examines how the stress and energy level of an employee fluctuate
during a workday. This in order to understand, and possibly optimize, the performance of
an employee as it may be considered likely that different employees have different
energetic needs; some may for example “run out of energy” if they work long hours,
others on the other side, may manifest a different attitude towards the work, which may
actually make them gain energy during a workday. Nowadays different American
management consulting firms are offering ways to optimize the performance of
employees through improving their energy. However, their foundation seems to be based
on Ericsson’s study on for example how musicians practice. Thus the present study may
offer important knowledge as on how to optimize for example the workday to meet the
needs of specific employees, or groups of employees, which may hopefully improve,
amongst others, employee well-being, performance, job satisfaction, and ultimately,
company financial performance. The research is based on previous work of Torp, Marosy
and Purcarea (2014), and Torp, Albulescu, and Purcarea (2015), as well as works done by
Einstein, Hawking, Tiller, Hunt, and Motoyama. The technical part of the research is
conducted with the Electrophotonic Imaging Device, developed by Korotkov (2014).
Keywords: human resource management; performance; energy; stress; electrophotonic
imaging; talent management; applied mathematics.
Introduction
Have you ever had the feeling that you were “out of energy”? That you show up at work
fresh (well, more or less fresh) in the morning, and then suddenly, perhaps after some
hours, feel that you “don’t have any energy left”? It is most likely that you, like the rest
of us, have felt so. There is something interesting about that feeling. It is completely
absurd!
According to Einstein everything in this universe consists of energy, and thus this must
also be true for everything in your being; your physical body, your feelings, emotions,
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skills, qualities, competencies, dreams, etc. etc. etc. Everything is energy, so how can
we feel “low on energy”?
This study does not try to answer all that, at least not in the first step. What it does is to
look at the stress and energy level of different employees during a workday in order to
see how they fluctuate, and thus, how it may be appropriate to manage different
people, perhaps different groups of people, differently. Some may be brought to deliver
top performance by reminding them to have small breaks and to eat and drink enough
during the workday. Because this is what ensures that their energy level remains high,
and thus gives them the necessary energy to remain calm and fulfill their work tasks.
Others may need an exactly opposite kind of management in order to deliver top
performance; tough deadlines, and supervision. And then again may there be a group
of employees who actually need guidance regarding how they spend their spare time,
as they may lose a lot of energy in between the end of one workday and the beginning
of the next.
The goal of this is to help people to gain as much energy as possible, and thus to
perform at their maximum, yet as the authors of this article do not believe in the “one
size fits all”-philosophy, especially not in Human Resource Management (or in any
other domain dealing with human beings (Dobson & O’Keeffe, 2005)), we consider it
an important, and necessary, step in the evolution of the field, to begin by clarifying the
energetic fluctuations of different employees during a workday.
Methodology
As Torp (2014, 2015), Torp, Marosy and Purcarea (2014), Torp, Albulescu and
Purcarea (2015), and Torp, Bunea and Cipu (2016) have examined in previous studies
it seems that there exists an objective and quantitative way to assess a human being
based on measuring that person’s electromagnetic field. This is based on Einstein’s
famous equation, E=MC2; in other words, that everything in this universe consists of
energy. According to Quantum Physics, four forces govern this energy: Gravity,
Electromagnetism, The Strong Nuclear Attraction, as well as The Weak Nuclear
Attraction.
As Stephen Hawking (2010) writes that “Electromagnetic forces are responsible for all
of chemistry and biology”, it seems plausible that it should be possible – with
sufficiently advanced measuring equipment – to make objective and quantitative
assessments of a human being, based on that person’s electromagnetic field.
Furthermore, as Professor Dr. William A. Tiller (1997) states that there is a connection
between a person’s functioning and that person’s electromagnetic field, then these
measurements should be able to predict for example skills, competencies, qualities,
behavior, and even professional performance. In other words, such measurements may
help in predicting the top performer, and, which is possibly even more important, such
measurement may also be used in order to help people to develop and to gain more
energy.
The energetic structure of the human being has been examined by for example
Professor Dr. Valerie V. Hunt (1996), as well as Dr. Motoyama (1978). However their
research, especially that of Hunt (1996), focuses more on the general health of the
Management and Leadership 473
human being, although it also contains certain findings which may prove useful in an
HR context, whereas the research conducted by Motoyama (1978) was to show the
possibility of making predictions about a person based on that person's energetic
structure.
The study design
This study is based on the empirical data collected from two different large
multinational companies; from now on referred to as company A and company B. Both
these companies are, by coincidence, in the transportation industry, yet all the
participants have office functions, some in HR, some in accounting, this for company A.
In company B all the participants work with administrative tasks regarding the
services the company offers.
In company B 7 employees were measured; this constitutes the entire staff of their
Romanian office. In company A a total of 28 employees were measured, which
constitutes a small part of one of their Romanian departments, which at the present
moment has around 200 employees.
In both companies each employee was (attempted) measured 5 times during a
workday; once before the start of the work in the morning at 9.00, and then with two-
hour intervals until the final measurement at around 17.00.
In company B every person was measured thus five times during a day, this was
possible – perhaps - because company B is smaller and there were no secondary tasks
scheduled for that day.
In a company, A several of the people measured were not able to attend some of the
measurements during the day, due to meetings, training, etc. Thus the graphs for this
company are based on the first and the last measurements as the large majority
participated in those measurements.
In order to ensure high reliability as possible, the project had been presented to the
invited participants in the days before, where most of the participants had been
measured in order to remove any anxiety regarding that experience, which possibly
could influence the outcome of the measurements.
The measurements
The measurements on which this study is based were performed by the use of the
ElectroPhotonic Imaging (EPI) Device, developed by Professor Dr. Korotkov and his
team. This device measures the photons, which the human being is emitting, and based
on that assesses, amongst others, the energy as well as the stress level of the person
being measured (Korotkov, 2014). It may be added that with version 5.3.0.0 of the EPI-
software the word “stress” has been replaced with the words “emotional pressure”.
Each measurement takes less than a minute in total for a person and is non-invasive.
The graph of stress goes from 0-10 where 0-2 is defined as “calm”, 2-3 “optimal”, 3-4
“anxiety”, 4-6 “stress”, 6-8 “heightened”, and finally 8-10 as “high”. On the energy scale
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the interval 0-20 is classified as “low”, 20-40 “lower”, 40-70 is classified as “optimal”,
70-90 “heightened”, and finally 90-100 as “high”.
For this study in company A the “Stress Test” which only measures 2 fingers was
conducted. This because the employees in company A were relatively new to this kind
of measurements, and also to enable the measurements in as short a time frame as
possible. As company B is part of another study regarding the connection between
stress, energy and professional performance, and thus had significant experience with
the EPI measurements, a full scan was performed with them.
Analysis
In the following, we shall analyze (Bruce, 2007) the findings from this study. This will
be done separately for each company. The findings regarding stress and energy will be
treated separately.
Findings for company A
Stress
This graph represents the findings for company A regarding stress. The stress level is
represented on the y-axis and the different people included are represented on the x-
axis.
It is obvious that the morning measurement (9.00) has the largest variation as both
person 7, 13, 14, 15, and 16 show large differences from the rest of their
measurements. In other words, from the 16 people included in this graph 5 (31,25%)
show large variations in the stress measurement in the morning. This may be due to
many reasons; wild nightlife, B-person sleeping behavior, children, traffic, tension
regarding the work, etc.
However, after the initial variation in the stress measurements it seems to settle at a
quite stable – individual – level for the rest of the day, with the exception of person 2
who has been measured as increasing the stress level significantly at the 11:00
measurement, hereafter it shows a stable level the rest of the day.
Management and Leadership 475
Figure 1. Findings for company A regarding stress
Continuing with the Stress Decreasing Histogram we observe that there is a general
decrease in the measured stress level of the participants during the working day.
Obviously, some decrease their stress more than others, yet it is significant to observe
that everybody is less stressed at the end of the working day than at the beginning.
This may be considered a more or less surprising finding.
Figure 2. The Stress Decreasing Histogram of company A
Table 1. Stress decrease for company A
Bin Frequency Cumulative %
-67.85% 1 5.26%
-50.99% 0 5.26%
-34.13% 4 26.32%
-17.28% 9 73.68%
More 5 100.00%
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Thus the measurements show that in company A the employees become less and less
stressed, generally speaking, during the workday, and that the largest variation is
found in the first measurement of the day.
Figure 3. Stress decreasing afternoon/morning for company A
The last graph to be included is the Stress Decreasing Afternoon/Morning graph. This
graph shows that in company A out of 19 people 16 have diminished their stress level
during the workday. From these 13 have diminished it with at least 20%, and 6 have
diminished it with at least 30%.
Discussion of the findings regarding stress for company A
As the measured employees from company A show a decrease in the measured stress
level during the working day there doesn’t seem to be any worry, from this
perspective, regarding their ability to deal with their workload.
However, as the largest variation is manifested in connection with the morning
measurement it may be that company A could optimize the performance of its
employees for example by introducing flex-time (assuming that this is a practical
possibility). If we assume that there is a connection between stress and performance,
meaning that a stressed person doesn’t perform as good as a relaxed person, then it is
possible that the general performance of the almost 1/3 of the employees which show
an increased level of stress in the morning interval would increase, as they could show
up at work in a rhythm which fit them, and then compensate by working longer in the
afternoon. Of course it needs to be clarified if the factors which cause the stress would
be removed/diminished by this – like for example wild nightlife, B-person sleeping
behavior, traffic, etc. – or if it would just be moved from one end of the working day to
the other – like for example children; it may be equally stressful to have to pick them
up at an institution in the evening before it closes, as to bring them there in the
morning. (At least those are the considerations of the author who has no children.)
Thus, given the large part of the employees at company A, which manifest increased
stress in the morning, it seems reasonable to assume that company A would profit by
trying – if possible – to adapt its work program to the needs of its employees.
A few people have shown an increase in their stress level at the end of the workday
compared with the beginning of it. It may not be practically reasonable, nor profitable,
Management and Leadership 477
to aim at everybody being more relaxed at the end of the workday, and as the general
level of stress is reasonable this may not constitute any major concern for company A.
Energy
The first graph shows that clearly the morning measurement (the 9.00 o’clock) – again
– is the one deviating most from the norm. This is followed by the next measurement,
the 11.00 o’clock, which is, for all but one, lower, if not much lower, than the norm.
Then starting with the 13.00 o’clock measurement each participant seems to have
found his/her level, which doesn’t vary much for the rest of that working day.
Whether or not that level is ideal for top performance needs to be clarified by further
scientific studies. It may be that a person cannot support being at such a level of energy
for longer periods at a time. This also requires further scientific studies to clarify.
However, should that be the case, then suggestions offered by for example (Groppel,
2000; Schwartz, 2010), or, for example of working intensely for intervals not exceeding
90 minutes at a time, and then follow up with a break, possibly doing sport, or eating
something, may be scientifically proven to offer value to both the employees, as well as
to the company.
Figure 4. Energy level at company A
Figure 5. Energy Increasing Histogram for company A
Continuing with the Energy Increasing Histogram we see that everybody has increased
their energy level during the work day, all but one have done so with more than 30%,
which must be considered very relevant to understand why this happened.
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Figure 6. Energy increasing afternoon/morning for company A
The last graph regarding this, the Energy Increasing, shows that all the 19 participants
measured have more energy at the end of the workday than they did at the beginning.
The least having almost 10% more energy, 11 from 19 having 50% more, and a single
participant even having doubled the energy level during that workday.
Discussion of the findings regarding energy for company A
Once again the results from company A must be considered good. Nobody has been
measured as being below 50, which is on the scale indicated as “normal/optimal” by
the EPI-software. However, once again we observe large variations in the
measurements during the workday. Everybody starts out with less energy than they
have at the end of the workday. This is also valid for the second measurement. Thus it
seems that there may be a certain “inertia” which has to be overcome before the
participants started manifesting their full energy. If it is found that there is a
connection between a higher level of energy and performance, then there is a potential
for optimizing the workday, which should lead to diminished costs and/or increased
outcome for the company. Yet it may also be that a person cannot support such a high
level of energy on a long-term basis, and thus the observations may show that the
people in company A are pushed hard at the end of the workday, where the company
possibly could optimize the performance of the employees by integrating activities to
compensate for the intense workload; like breaks, sport, snacks, etc.
However, one relevant question arises. If an employee, for the sake of argument let us
take employee number 2, shows up at work with an energy level of around 55, and
leaves 8 hours later with an energy level of around 90, and this happens every day,
what exactly happens in the life of this employee, energetically speaking, in the time
when s/he is not working? S/he comes to work with a low energy level (relatively
speaking) and goes home with a high energy level, only to appear the next day with a
low energy level again? Further studies need to be conducted in order to clarify this,
however, the question is both interesting as well as relevant as it may help people to
optimize their energy use, and thus avoid activities which drain their energy, and thus
may both they and the company benefit from increased performance. On the other
side, it may also be that the drop in energy from the end of one workday till the
beginning of the next constitutes a necessary recovery period, like the off-season for an
athlete, and thus should be encouraged.
Management and Leadership 479
Conclusions regarding the observations in company A
It seems that generally speaking, the observations in company A are good. The stress
level is in a reasonable zone, which indicates that there is no fear that anybody should
break down with stress, and the energy is also at what seems to be an appropriate
level, at least not being too low. However, based on the empirical observations it seems
that there may be an opportunity to optimize the workday, and thus possibly also the
performance.
The stress level fluctuates a lot in the morning, and it could be profitable, on a long-
term basis, for the company to investigate if this is due to factors, which could be
changed. In other words, if flextime or perhaps telecommuting were possible solutions
for company A there may be an opportunity to optimize the work structure to the
desires, or needs, or the employees.
Regarding the energy level. Here the issue may not so much be what happens with the
energy level during the workday because all employees have more energy at the end of
the day than they had at the beginning, although for some more than for others. Here
the big question seems to be what happens with the energy level of the employees
after the end of the workday. If the observations are representative of the general
changes in the energy of the employees then it seems that there is a relatively large
drop of energy from the end of one workday till the beginning of the next. Once again,
assuming that people with a high level of energy are high performers the company may
have an advantage in maintaining this high level of energy. It may be that the company
offering sports, healthy diet, or at least knowledge about healthy diet, guidance on
recreation patterns, etc. may benefit both the employees as well as the company on a
long-term basis. However, it could also be that this drop in the energy is a necessary
condition for the long-term optimal performance of an employee, as a human being is
not a machine, and thus may not be able to function at a high level for long periods at a
time.
Findings for company B
In the left side of the table we have each employee, and then the changes in stress as
well as the frequency of which these changes have occurred, and then the same with
energy.
In company B it seems that we can make three categories of employees, based on how
their measurements change during the day:
Category 1: The people who diminish their stress and at the same time increase their
energy during a workday.
Category 2: The people who remain quite stable in both stress and energy.
Category 3: The people who become more stressed during a workday and who at the
same time show a loss or stability in their energy level.
Table 2. Stress and energy development in company B
Stress Stress Energy Energy
Employee Frequency Frequency
decreasing increasing increasing decreasing
1 -38.36% 29.07% 42.86%
2 -37.52% 42.86% 57.63%
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3 -33.88% 26.36%
4 -4.71% 28.57% 16.54% 42.86%
5 -2.94% 10.21%
6 28.85% 28.57% 3.19%
7 50.00% -9.87% 14.29%
Discussion of the findings regarding company B
It is safe to say that management may have to develop from the boss who knew
everything and told everybody what to do, to the couch, or something similar, which is
taking care of the specific needs of each individual. That at least seems to be a
reasonable assumption regarding the needs of the employees in company B.
The approximately 40% who decrease their stress and increase their energy during
the workday may not need any extra supervision or motivation from their manager.
They are doing fine. However, it may be that they, like some of the employees from
company A, could benefit from things which help them optimize their energy and keep
their stress reduced outside the workday. It is easy to speculate about what might help
them, however, the only real way to know is to ask for their suggestions, and then
conduct further scientific studies.
The second group, which is quite stable, considering that their energy level increases
slightly during the day, does not seem to need any adjustments, at least not in the short
term. It may be that their performance could be optimized by long-term activities, like
as many companies do; offer a sport or other activities aiming at increasing the overall
health of the employees.
The third category may, from a certain perspective, be the most interesting. Here the
stress has increased during the day. It is important to keep in mind that everybody in
this company has the same job function. Thus, the same stimuli have generated a
different outcome in some than in others. It is worth examining if these employees,
those in category 3, would show improvements in case they would receive a stress
management course, or, as for example Schwartz and McCarthy (2010) suggest,
improvements could be obtained by creating a working structure where they could
take a break, possibly to eat something, around every 90 minutes during the work day.
There is, to the best of our knowledge, no scientific research regarding office workers
which support such hypothesis, and it may easily be that the outcome of such
initiatives could be an increase in stress, because now the individual employee feels
that s/he has to do the same work in less time, yet it is a hypothesis worth examining
in a scientific way.
Conclusions regarding company B
It seems that the employees in company B may fit, more or less, into three categories,
based on the development in their stress and energy level during a workday.
Further scientific studies would be recommended in order to clarify first of all if this is
a general tendency, as the test sample is not overwhelmingly large, and if so, to
understand how the employees in each of these categories may be helped to optimize
Management and Leadership 481
their performance. Once again the question regarding what happens to people's stress
and energy outside the workday arises.
Conclusions
The conclusions of this study are that certain energetic fluctuations occur in the stress
and energy levels of the employees during a workday. For some employees, they seem
to be to the better, for others to the worse.
It is way too early to start discussing how the workday and work structure needs to be
in order to help the employees to deliver optimal performance. However, it seems to
be safe to hope that with implementing Electrophotonic Imaging measurements into
Human Resource Management we shall, in time, be able to improve the work structure
and thus help the employees to deliver even better performance, which ultimately
should create improved company performance. One thing is clear. A lot of further
scientific research is necessary in order to clarify those elements.
According to Boxall and Purcell (2011), HR is involved in the performance of a
company. What we wish to understand is … how. So far HR scholars have spoken about
the “Black Box” of HR (Boxall, 2011; Fleetwood, 2010; Torp, 2015), where basically
some input – like work hours – goes into the company, and then, hopefully, some
useful output comes out. That may or may not be an optimal understanding of what
goes on inside a company. Our intention with this study, and the studies to come is to
clarify, as good as possible, how each individual contributes to the performance of the
company, and thus how each individual is enabled to deliver top performance. This is
probably going to be very individual, and looking at how other professions, like
musicians (Ericsson, 1993), or athletes train and perform (Torp et al., 2016), is
probably a very good beginning, yet now it seems to be the time to look closer into the
inner workings of the company, and its employees, in order to help improve well-
being, motivation, engagement, and ultimately, company performance.
Acknowledgments: We would like to thank all the participants in
this study, as well as the companies they work for. Without your kind
help, this study would not have been possible.
References
Boxall, P., & Purcell, J. (2011). Strategy and Human Resource Management, 3rd edition.
Tokyo: Palgrave Macmillan.
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measurements and statistics. Kansas: Sage publications.
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Dublin: IEEE Xplore.
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Fleetwood, S., & Hesketh, A. (2010). Explaining the Performance of Human Resource
Management. New York: Cambridge University Press.
Groppel, J., & Andelman, B. (2000). The Corporate Athlete. New York: John Wiley &
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Malibu: Malibu Publishing Co.
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Petersburg: Ebookit.Com.
Loehr, J., & Schwartz, T. (2003). The Power of Full Engagement. New York: Simon &
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Schwartz, T., Gomes, J., & McCarthy, C. (2010). The Way We’re Working Isn’t Working.
New York: Free Press.
Tiller, W. (1997). Science and Human Transformation. Walnut Creek, California: Pavior.
Torp, A.M. (2014). Quantum Physics & Human Resource Management. Copenhagen:
Copenhagen Business School.
Torp, A.M., Marosy, Z.I., & Purcarea, A.A. (2014). Quantum Physics & Human Resource
Management – Defining the Field. SEA - Practical Application of Science, 3(5), 27-
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Intelligence Studies. III(1), 69-73.
Torp, A.M., Albulescu, S., & Purcarea, A.A. (2015). Human Resource Management &
Company Performance - What Do We Actually Know? SEA - Practical Application
of Science, 2(8), 13-18.
Torp, A. (2015). Opening the Black Box of HRM. International Conference of
Management and Industrial Engineering. Retrieved from
http://www.ieem.org/public.asp?page=home.htm.
Torp, A., Bunea, A., & Cipu, C. (2016). Company Aikido – It Seems to be a Practical
Method to Reduce Stress and Increase a Person’s Energy. SEA – Practical
Application of Science, 1(10), 109-112.
Management and Leadership 483
RESPONDING TO DISCONTINUITIES
– ALTERNATING ACTION PATTERNS OF VALUE APPROPRIATION
Marta NAJDA-JANOSZKA
Jagiellonian University in Krakow
4 Lojasiewicza, 30-348, Krakow, Poland
eknajda@cyfronet.pl
Abstract. Challenged by the lack of research on the dynamic nature of value
appropriation confronted with disruptive triggers this study aims to enhance the
understanding of a relationship between discontinuity and value appropriation. More
specifically the paper studies how a discontinuity affects complex action patterns of the
value appropriation process. Given that, the defined research area remains not well
understood, the investigation followed a qualitative approach using a field-based case
study method governed by a multiple case design research strategy. To accomplish
research propositions five in-depth case studies were performed. All cases concerned the
path dependency breaking the influence of discontinuities over value appropriation
process in firms exhibiting highly intensive use of knowledge and technology in
performed business activity. Extracted data enabled identification of discontinuities that
occurred across different dimensions of environment and were addressed with path
breaking alternations of value capturing practices. Obtained findings indicated that
investigated firms exhibited a high responsiveness to sudden discontinuities. Deployed
responses involved substantial changes in value appropriation, which concerned the
quantity, diversity, and combination of formal and informal isolating mechanisms.
Structured reactions induced branching of current action patterns of value
appropriation. Given that branching was preceded by intended strategic information
gathering, evidenced line of action complies with the concept of dynamic capabilities. The
overall sequence of undertaken actions captured in an appealing framework complies
with a graduated response to weak signals discussed by Ansoff (1975).
Keywords: discontinuities; strategic change; value appropriation; dynamic capabilities.
Introduction
The growing dynamics of the environment forces firms toward incorporation of that
dynamics into their strategic management in order to grow, and most importantly to
survive (D’Aveni, 1994). A strategic attempt to exploit effectively changes in the
environment needs to be supported by inevitable modifications in deployed patterns
of action. Meanwhile, it is a common observation that despite a growing demand for
flexibility firms often remain inert and locked in behavioral and decision-making
patterns shaped by a past experience (Sydow, Schreyogg & Koch, 2009). As pointed out
by Leonard-Barton (1992) firm’s most important capabilities may become its core
rigidities as the firm becomes overly focused on successful behavioral patterns to
anticipate and recognize discontinuities that undermine the usefulness of currently
used knowledge. From a strategic perspective rigidity resulting from the path,
dependency is a notion of potential inefficiency (Sydow et al., 2009).
484 Strategica 2016
A thorough review of the literature on management has confirmed that the problem of
organizational response to discontinuities has been discussed predominantly with
regard to activities performed along the value creation process, while its mirror
reflection, which is an appropriation of created value, has received much less scholarly
attention (Coff, 2010). It is quite surprising since value appropriation makes a direct
impact on the profitability of an organization (Makadok & Coff, 2002) and the logic of
value distribution may or may not follow the rules governing the value creation
process. The number of research works devoted to the complex issues of value
receiving, protecting and retaining is now relatively modest, concerning both
theoretical and empirical dimension. In result, there is no coherent framework
enabling investigation of the way firm responds to discontinuities by alternating its
action patterns focused on value appropriation.
Thus, this study aims to enhance the understanding of a relationship between
discontinuity and value appropriation, contributing to research that explores the
dynamic nature of the process of value capture. The study builds its arguments and
contribution on a framework emerged from the extant theory review and qualitative
research carried out in accordance with a multiple case study design.
Literature review
Firms face a multitude of changes occurring in the external landscape. Those more or
less disruptive events require simultaneous management to align an organization to
the turbulent environment (Prahalad, 1998). On the one hand, environmental changes
may provide new supportive circumstances for business growth, while on the other
hand may generate threats to the current performance of even existence of a firm
(Benner & Tushman, 2002; Gilbert, 2005; Lavie, 2006). The importance and difficulty
of an organizational response stem from this duality of influence and the fact that at
early stages it is quite difficult to discern clearly whether the final impact of a
particular event will develop into a threat or opportunity (Ansoff, 1975). Moreover,
occurring changes may be of incremental nature, leading to extrapolation of current
trends, or may induce a radical shift of existent development trajectories by rendering
deployed lines of actions obsolete (Ghezzi, 2013; Gilbert, 2006). Given that sudden,
unexpected breaks in dominant conditions have been increasing in frequency, the
problem of organizational response to discontinuous changes has drawn a significant
amount of scholarly attention in the field of strategic management (e.g. Ansoff, 1975;
Gilbert, 2005; Ghezzi, 2013; Tripsas, 2009; Kaplan, 2008). Although lacking a widely
accepted definition, generally it is assumed that a discontinuous change refers to an
abrupt, unforeseen shock requiring an organizational adaptation along a shifted
trajectory (Christensen, 1997; Gilbert, 2005; Rothaermel & Hill, 2005). According to
the extant strategic management literature, the nature of such discontinuous changes
may vary (Prahalad, 1998; DeSarbo et al., 2005; Tripsas, 2008). A complete newness in
the circumstances may be driven by uncertainties occurring within or across different
dimensions of the environment, e.g. technological environment (Lavie, 2006; Tripsas,
2009; Rothaermel & Hill, 2005), market environment (Tripsas, 2008), competitive
environment (Prahalad, 1998; DeSarbo et al., 2005), regulatory dimension (Prahalad,
1998). It is worth noting that the range of explored discontinuities involves also those
of endogenous origins (Anderson & Tushman, 1990; Helfat & Peteraf, 2003). Internally
driven disruptive changes to refer generally to unexpected, unintentional shifts in
Management and Leadership 485
current action patterns triggered by resource/capability gaps and inherent risk
component of organizational behavior (Anderson & Tushman, 1990; Helfat & Peteraf,
2003).
Given the diverse nature of discontinuous changes (visibility, informational content,
area and time of occurrence, intensity of influence), large bodies of research have
examined challenges that firms encounter while formulating and deploying
appropriate responses (e.g. Smart & Vertinsky, 1984; Gilbert, 2005; Tripsas, 2009;
Ghezzi, 2013). Scholars have investigated organizational responses with regard to a
time lag between emergence of discontinuity and firm reaction (Tripsas & Gavetti,
2000), amount and type of resources committed to a new line of action as opposed to
reinvestment in the existing action patterns (Gilbert, 2005; Rothaermel & Hill, 2005;
Danneels, 2008), scale of capability reconfiguration (Gilbert, 2005; Kaplan, 2008;
Ghezzi, 2013), continuance of investment regardless of initial constraints (Tripsas &
Gavetti, 2000; Kaplan, 2008).
According to provided findings organizational difficulties in shaping firm action in
radically changed circumstances are centered on managerial cognition, organizational
identity and resource/capability endowments. Cognitive elements together with
managerial attention are decisive when it comes to initiation of a response to
recognizing and interpreting disruptive events as threats or opportunities (Smart &
Vertinsky, 1984; Gilbert, 2005). It has been confirmed that a strong perception of
threat helps overcome organizational inertia only partially, as it stimulates investment
in resources, yet in a rigid manner along existing routines (Gilbert, 2005). Further,
given that organizational “identity comprises insider and outsider perceptions of what
is core about an organization” (Tripsas, 2009, p.441), it is embedded in organizational
routines and serves as an interpretation filter, identity challenging disruptions are
difficult to discern and accommodate (breaking a dominant set of beliefs). Giving the
meaning to a recognized discontinuity brings in the issue of resource and capability
requirements, as disruptive changes render current resource configurations and
deployed patterns of actions obsolete (Leonard-Barton, 1992; Lavie, 2006). Facing
discontinuous changes firms are challenged either to leverage, extend, retrench, or
provide access to new resources and capabilities (Helfat & Peteraf, 2003). Thus
formulating an organizational response involves learning, unlearning and refining
behavioral patterns. There is an agreed consensus in the management field that
development and adjustment of capabilities in an effort to adapt to radically new
circumstances is particularly difficult (Anderson & Tushman, 1986; Lavie, 2006).
Moreover, it is argued that the organizational response can be governed by a specific
mechanism conceptualized as dynamic capabilities (Winter, 2003; Teece, 2007; Najda-
Janoszka, 2016).
Due to its inherent focus on change, the concept of dynamic capabilities represents a
relatively new and promising approach to explore strategic renewal (Eisenhardt &
Martin, 2000; Helfat et al., 2007). Dynamic capabilities are defined in terms of an
organizational capacity to purposively create, extend or modify existent capabilities
and resource base (Helfat et al., 2007, p.4). Hence, the logic of dynamic capabilities lies
in an intentional and routinized change in organizational action patterns across
different dimensions of business activity (Teece, Pisano & Shuen, 1997; Madsen, 2010).
It is important to underline that dynamic capabilities are not automatically involved in
every reaction to environmental disruption since their development and
486 Strategica 2016
implementation involve substantial cognitive, managerial and operational costs
(Ambrosini & Bowman, 2009). Thus, a decision on deployment of dynamic capabilities
depends on the balance of costs and benefits derived from their deployment in
comparison to other non-routinized responses (Winter, 2003). Recent advances in the
field allowed a more clear understanding of the routine-based content of dynamic
capabilities, leading to a comprehensive operationalization (Teece, 2007; Wang &
Ahmed, 2007; Pavlou & El Sawy, 2011; Helfat & Peteraf, 2015). Although the extant
literature provides a quite wide spectrum of distinct measurement approaches, most
of them are built on the notion of the initial operationalization proposed by Teece
(2007), which entails three main activity clusters of sensing, seizing and reconfiguring.
The concept of dynamic capabilities proved to be a very useful in explaining the
organizational response to disruptive changes in terms of capability reconfiguration.
Scholars have applied the concept to investigate firms’ reactions to discontinuities
generated by technological progress (e.g., Anand, Oriani & Vassolo, 2010; Danneels,
2011), market shifts (e.g. Verona & Ravasi, 2003; Danneels, 2011), dynamics of
industry architecture (e.g. Pavlou & El Sawy, 2011) or internationalization processes
(e.g. Kuuluvainen, 2013). Despite the broad spectrum of identified disruptive events
and distinct organizational responses, provided insights pertain predominantly to the
value creation process, while there is a lack of a thorough discussion referring to the
value appropriation process (Coff, 2010). The unsolved question concerns the way
discontinuities affect the nature of organizational capabilities deployed in the process
of value appropriation, i.e. how those capabilities are reconfigured in response to
disruptive change. The significance of the task stems from the fact that value capturing
is not a simple extrapolation of activities performed within the value creation process,
the nature and range of used resources and capabilities is quite distinct (Pitelis, 2009).
Value is not extracted and captured instantaneously but it requires a substantial effort
over a longer time span (Najda-Janoszka, 2016; Ellegaard, Geersbro & Medlin, 2009). It
is a process embracing development, deployment, and reconfiguration of complex
compositions of isolation mechanisms, i.e. tangible and/or intangible barriers
preventing replication of a particular behavior of a given firm (Rumelt, 1984). The
number of research works reaching beyond the individual effectiveness of selected
protection tools and devoted to the complex issues of value receiving, protecting and
retaining is at the moment relatively modest, concerning both theoretical and
empirical dimension (Coff, 2010; Fischer, 2011; Di Gregorio, 2013). Thus, the problem
of managing discontinuous change in the area of value appropriation remains to a
large extent underexplored.
Research methodology
Given that the relationship between the value appropriation process and
discontinuous change is not well understood, the investigation followed a qualitative
approach using a field-based case study method governed by a multiple case design
research strategy. While a case study research facilitates holistic understanding of
context-bound and complex phenomena, a multiple case study approach reinforces the
generalization of results, and thus enhances a reliable extension of existing theories
(Eisenhardt, 1989; Yin, 2014). To accomplish research propositions five in-depth case
studies were performed (Table 1). Because of the high sensitivity of collected data, the
names of investigated firms were disguised. All cases concern the path dependency
Management and Leadership 487
breaking the influence of discontinuities over value appropriation process in firms
exhibiting highly intensive use of knowledge and technology in performed business
activity.
Table 1. Description of investigated firms
Number of Turnover (2015)
Main business
Case employees (PLN in Established
activity
(2015) thousands)
Complex and
Case A integrated 23 >1 000 PLN 2004
marketing services
Design and
Case B construction of data 11 ~1 000 PLN 2008
processing centers
Trade of industrial
Case C 34 >10 000 PLN 1987
electronics
Production of
Case D suppressors and 305 >100 000 PLN 1991
transformers
1991 -
Technology
corporation
Case E solutions for 42 ~10 000 PLN
2010 -
transportation
business unit
Note: 1 EURO = 4,2623 PLN (31-12-2014) Polish National Bank – NBP
Cases rely on current and retrospective data collected through three waves of semi-
structured interviews carried out in 2012 (11), 2013 (11), 2014-2015 (13) with three
categories of informants (top and project managers of investigated firms, project
managers of cooperating partners), direct observations conducted in years 2013-2015
(13), extraction from internal primary (a total of 71 documents), and external
secondary sources (press releases, industry statistics and reports) (Figure 1).
Figure 1. Fieldwork timeline
The longitudinal study provided an opportunity for examining the change dynamics
over time, while deployment of multiple data collection methods and data sources
enabled triangulation of both themes and conclusions.
488 Strategica 2016
Results and discussion
A thorough analysis of extracted data enabled identification of continuous changes that
induced incremental adjustments along the existing development trajectory of value
appropriation process (change in the number and scale of used isolating mechanisms),
as well as discontinuities that occurred across different dimensions of environment
(Ghezzi, 2013) and were addressed with path breaking alternations of value capturing
practices. Table 2 presents results concerning discontinuous changes and
organizational responses pertaining to value appropriation action patterns.
Table 2. Collected evidence of organizational response to discontinuous changes
Discontinuity Final response
Strategic
Case Initial response information Before the major After the major
Time of
Characteristics gathering impact of impact of
emergence
discontinuity discontinuity
Perception
Opportunity for
First signals
Focused broadening and
Aggressive run for
search: stabilizing value
customers, losing at
Reviewing streams
bids Continuance -
needs and Response
Competition Initial perception developed system of
preferences of Structured -
intensity, Threat of controlled
customers, investment decision
entry of big misappropriation of complementary assets
solutions while still
players, 2005-2008 value streams reduced the impact of
provided by experiencing a
change of Type of initial discontinuity. Further
competitors, growth of revenue -
customer response decisions concerned
complementar own unique logistics
preferences Ad hoc initiatives – expansion of the
y technologies, system (copyrights),
price and time system
opportunities raising complexity of
delivery reduction,
for financial providing solutions,
intense use of
Case support extended control of
personal networks
A complementary
assets
First signals
losing at bids, losing Focused
Perception
existent customers search:
Threat of financial
Perception Searching
collapse
Threat of financial through
Response
collapse market trends,
Economic Ad-hoc initiatives -
Type of initial reviewing Continuance of ad-hoc
crisis: demand 2010-2013 breaking set rules for
response situation on initiatives
collapse protecting value
Ad hoc initiatives – new potential
streams in order
extending use value markets,
extending use value
for customers at the reviewing
for current and new
cost of the firm, price, internal
customers
and employment resource base
reduction
Perception
Focused Opportunity for
search: reorganizing and
Searching stabilizing value
through streams
First signals
market trends Response
Extending payment
and Structured –
terms by customers
possibilities Until the major expanding networks
Economic Initial perception
for financial impact - ad hoc of business
Case crisis: major Threat of financial
2010-2011 risk reduction, initiatives concerned relationships,
B payment collapse
reviewing with commencing diversification of
backlogs Type of initial
internal litigation business activity
response
resource base (unrelated industry),
Ad hoc initiatives –
and recombination of
commencing litigation
effectiveness extant and new
of used capabilities;
isolating readjustment of
mechanisms business model –
harmonizing streams
Management and Leadership 489
of costs and benefits
Perception
Opportunity for
broadening
appropriable value
Focused streams
search: Response
assessing Structured –
knowledge and introducing
technology procedures for
First signals
requirements customer evaluation,
Requests for
of new building network of
proposals from new Continuance –
markets, complementary
Market markets improving developed
reviewing assets, entering new
growth, Initial perception network system of
internal markets, extension
launching Opportunity for complementary
2013-2015 resource base and reconfiguration
postponed broadening value assets, strengthening
and of capabilities –
public sector streams protection of core
capabilities, developing
investments Type of initial architectural
verification of architectural
response knowledge
new markets knowledge in
Careful engagement in
(construction, modular design,
small scale projects
military) in developing an
terms of integrated
timeliness and knowledge
reliability of protection system
payments based on an
organizational
culture of discretion
and formal security
certificates
Perception
Opportunity for Perception
Focused
broadening Opportunity for
search:
appropriable value broadening
First signals searching
streams appropriable value
Losing at bids, through
Response streams
suppliers turning into technology
Increase of Structured – Response
competitors advances,
competition, reconfiguration due Structured –
Perception market trends,
entry of big to new procedures broadening the
1995-2000 Threat of customer
players, and philosophy of portfolio of suppliers
2005-2008 misappropriation of preferences,
market implemented CRM, in order to reduce
2012-2015 value streams solutions
growth due focusing on time- over-dependency,
Type of response provided by
technology based advantage, developing own
Ad hoc initiatives – competitors,
advances changing value product line and own
intensification of sales reviewing
Case streams balance from trademark,
forces, reinforcing internal
C selling toward diversification in
quality focus resource base
maintenance and areas of
and
servicing, changing complementary
capabilities
regional sales offices technology
to service centers
First signals Focused and Perception
Postponed broad search: Opportunity for
Financial investments of searching strengthening and
crisis: collapse customers through Immediate impact broadening
of the main Perception technology due to domination of appropriable value
2009-2010
market – Threat of weakening advances, financial institutions streams
banking market position market trends, in customer portfolio Response
industry Type of response customer Structured –
Ad hoc initiatives – preferences, developing a network
refocusing on solutions of external servicing
490 Strategica 2016
servicing current provided by engineers,
customers competitors, implementation of a
reviewing new proprietary
internal training system ,
resource base entering new internal
and and foreign markets
capabilities and developing broad
personal business
relations,
improvement of
management
practices – closing
regional offices with
inefficient
performance
Perception
Opportunity for
strengthening
appropriable value
streams Perception
Focused and Response Opportunity for
broad search: Structured – broadening
reviewing integration with a appropriable value
internal global corporation streams
resource base (world leader in the Response
Increase of First signals
and photovoltaic Structured –
competition, Drop in sales, price-
capabilities, industry), reorganization
technology reduction pressures
market trends, development of R&D through cost
progress, Perception
and policy division following reduction and lean
Case saturation of Threat of diminishing
2010-2015 mechanisms four eyes principle, management
D the market, returns
for renewable introducing and implementation,
regulatory Type of response
energy, integrating new improvement of
changes (feed- Ad hoc initiatives –
advances in areas of expertise, management
in electricity cost/time delivery
production developing new practices and
tariffs) improvements
technologies procurement division implementation of X-
and materials, and a network of team technique,
competitive suppliers - entering new related
structure of redefinition and markets with
industry reconfiguration of complementary
core knowledge technology
protection system
(procedures,
encryption
techniques).
Perception
Opportunity for
securing and
Focused and strengthening
broad search: appropriable value
First signals reviewing streams
Problems with internal Response
satisfying raising resource base Structured –
expectations of and developing own R&D The impact was
Convergence
customers capabilities, department reduced by the
of
Perception scanning following four eyes investment, which
Case technologies,
2011-2015 Threat of lowering market trends, principle, investing in matched the
E modification
profit margin related and own know-how development
of customer
Type of response unrelated related to open trajectory of the
expectations
Ad hoc initiatives – technology architecture technology used.
reaching for a backup advances, programming,
from the R&D of the solutions integrating newly
parent company developed by acquired knowledge
direct with existing
competitors capabilities,
development of
proprietary training
on confidentiality
According to collected evidence in all cases, firms conducted an on-going, systematic
process of environmental scanning, which enabled a relatively early detection of the
Management and Leadership 491
first signs of disruptive changes (Ansoff, 1975; Rohrbeck, 2011; Ghezzi, 2013). Guided
by the perception build on initial input information, investigated firms responded with
immediate initiatives involving the most intense use of controlled resources along
existing routines of value appropriation (Gilbert, 2005; Rothaermel & Hill, 2005).
Hence, deployed actions generally aimed at maintaining status quo in terms of the
amount of captured value. Nevertheless, in parallel with initial responses firms
engaged more heavily in refocused strategic information gathering in order to
generate a more comprehensive picture of detected disruptions (Ansoff, 1975).
Interestingly, with information that is more specific provided an initial negative
perception tended to shift towards opportunity-seeking attitude (Gilbert, 2005). In the
case of opportunity driven initial response, additional strategic information reinforced
the positive perception of experienced discontinuity.
Shifted or strengthened perception formed a basis for a structured response, which
was designed and implemented to confront the major impact of a discontinuous
change. In accordance with Gilbert (2005), an opportunity-driven structured response
was focused on breaking path dependencies and current action patterns of value
appropriation. The overall sequence of undertaken actions illustrated on Figure 2
complies with a “graduated response through amplification and response to weak
signals” discussed by Ansoff (1975). Nevertheless, given the distinct nature of
experienced discontinuities and organizational idiosyncrasies, the time lag between
the emergence of disruption and a structured response differ among investigated firms
(Tripsas & Gavetti, 2000). In Cases B and C, firms did not manage to implement
responses before the major impact of the disruptive change. Both firms experienced
difficulties in capturing value streams, yet prepared and deployed structured reactions
enabled relatively quick recovery, reduction of the negative impact and in result
strengthening their financial condition and strategic position toward main
competitors. Conversely, in Case A after a successful adaptation to a supportive market
disruption, investigated firm failed to develop further its organizational learning
processes, which did not match the enlarged scale of business activity. In result, the
firm was unable to formulate a comprehensive, structured response to discontinuity
caused by the economic crisis (Winter, 2003; Helfat & Peteraf, 2003).
Figure 2. Changing value appropriation action patterns in response to discontinuities
492 Strategica 2016
Overall investigated firms confirmed a high responsiveness to sudden discontinuities.
Deployed responses involved substantial changes in value appropriation, which
concerned the quantity, diversity, and combination of formal and informal isolating
mechanisms. Based on gathered strategic information a structured reaction of
investigated firms induced branching of current action patterns of value appropriation.
This complies with the concept of dynamic capabilities (Helfat & Peteraf, 2003).
Therefore, the framework describing changing value appropriation action patterns in
response to discontinuities (Figure 2), which emerged from experiences of
investigated firms and reviewed theory, clearly indicates three activity clusters of
dynamic capabilities, i.e. sensing, seizing and reconfiguring (Teece, 2007).
Conclusions
The framework, which emerged from the conducted research, provides new insights
into how the organizational response to discontinuities extends beyond the
technology/marketing frontier, involving action patterns of value appropriation. In the
process of organizational alignment to disruptive changes, value appropriation is not
independent but dependent variable. Obtained results provide a rich picture of the
breadth and complexity of strategic reconfiguration introduced within the domain of
value capture. The study contributes to the strategic management field by enhancing
understanding of value appropriation in terms of a process, which is characterized by
its own dynamics as it undergoes various alternations due to continuous and
discontinuous triggers. An indication of perception shifts while approaching a
structured response to external disruptions should serve as a point of departure for
subsequent studies focused on a micro level of managerial cognition in the process of
value appropriation. Nevertheless, a cautious reflection on contextual conditions and
implications of the study is needed due to analytical generalization based on a limited
number of five cases.
Acknowledgements. The study is a part of a larger project “Dynamics and
determinants of the process of appropriating value from projects implemented
in the inter-organizational networks” financed by National Science Centre of
Poland (NCN) on the basis of the decision number-2013/11/D/HS4/03965.
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Management and Leadership 495
THE CREATION OF A SCHOOL LEADERSHIP TEAMWORK BY
PERSON-CENTRED APPROACH (PCA)
Mária PISOŇOVÁ
Comenius University in Bratislava
3 Moskovská St., 813 34, Bratislava, Slovakia
pisonova@fedu.uniba.sk
Abstract. The issue of efficient management of human resources is currently a very
popular topic, mainly due to deteriorating relations in the workplace. The unsuitable
working environment causes a lower level of the education process and frequent
employee’s turnover and destabilization of the working team. The paper discusses
possibilities to solving current problems in the process of leading school employees
through the PCA (Person Centered Approach - Education) philosophy that was authored
by C. R. Rogers. The main topic of the paper is the importance of team positions for the
efficient execution of tasks, from the perspective several scientific findings. These aspects
of leadership will accentuate the fundamental principles of PCA based on an empathic
understanding and acceptance, i.e. without any conditions and a positive acceptance of a
teaching employee by a director, respectively by top management of schools. The said
PCA characteristic allows the creation of school manager team through equal
representation of the various team roles. There are companies in Slovakia, which apply
the Test of team roles for selecting the employees or other tools such as the Test of the
professional type, which was established by Holland. These approaches will allow a
professional approach to creating a work team that can effectively cooperate and
participate in the fulfillment of tasks in variable levels of difficulty. The paper has an
ambition of the scientific study, which is focused on identifying an equal respectively
unequal representation of different team roles in the pedagogical work team. The
descriptive research solves the problem at various levels of educational institutions in the
Slovak Republic. Within the part of the interpretation of research in the paper, we
introduce results the realized analysis of positive and negative findings. The analysis
refers the impact of the success of the educational institution. The results of research
suggest that school management does not respect the above requirement in the process
of recruitment and selection. The result of the issue is the problematic functioning of a
pedagogical work team to fulfill workloads. It is very interesting that the results reflect
similarities between respondents from kindergartens, primary schools, and secondary
schools. Finally, the study discusses solutions for the identified problem and also
recommendations for the school management practice.
Keywords: Person-Centred Approach; education; hidden leadership; team roles; head
teacher; leadership.
496 Strategica 2016
Introduction
The contemporary society is undergoing significant changes in recent years, and these
are increasingly intervening in education. As a result, this evolution is increasing not
only the work of the school management, of the teaching staff, and thus of the pupils.
Same change occurred mainly in the scope and content of work managing teaching
staff, which increased demand for school management - system element schools and
education. In today's conditions, the headmaster must focus on the development of the
school, its innovation, and autonomy. S/he has to create a vision of that school and to
implement the appropriate strategies. Veteška (2011) identifies innovation in
education as a key strategic concept of school education. Management of schools and
school facilities, therefore, is regarded as one of the key prerequisites for the
optimization of educating students.
The main output, on which the school management is focused on, is to educate pupils.
School management is therefore predominantly focused on the educational process.
Pisoňová et al. (2014) argue that the educational process must remain at all times the
base area of school life. School management should, therefore, be guided by the
internal management of the school, which aims to ensure its successful operation.
Leadership plays a critical function because it focuses on the personal page of teachers
and educators, their interrelationships and develops their personal potential. Among
other things, a manager is fully responsible for school leadership; s/he encourages its
employees to obtain higher performance. A manager is expected to be a leader.
However, in this context, s/he must recognize the difference between the function and
role (Trojanová, 2014, p.9). Leadership is part of the management process,
respectively management functions. Leadership is the ability to convince others to try
to achieve the objectives of the school with enthusiasm.
The core of many organizations is a team of people who combine their abilities and aim
to satisfy the needs of customers, respectively legal guardians of pupils. Teamwork is a
prerequisite for the perfect and effective interplay of employees in the entire chain of
activities. Cooperation always produces better results than the independent action of
individuals. It has its meaning, especially in the management of teamwork. The
headmaster should therefore thoroughly know the staff and this knowledge embedded
into the framework of other disciplines, for example, psychology, ethics and more.
The present contribution corresponds to this requirement. We aim to improve
management theory through empirical studies, in this case, applied to the process of
managing the school organization.
Leadership in the context of school management
"The words manager and leader are the words that stand at opposite ends of a single
continuum. The manager is more rational, more controlled, orderly and well thought
out part of a continuum, while the leader takes rather more experimental, more
visionary, more flexible, more creative and less more controlled framework. (Hickman,
1995, p.21). The term leadership is one of the most frequent terms of managerial
theories and not just in English-speaking countries. The manager's task is to perform
management functions, but the leader`s is to motivate others and create a climate of
Management and Leadership 497
enthusiastic cooperation. Thus, the term leadership also can be called guidance
(Armstrong, 2006; Eger, 1998).
Leadership is a many-layered phenomenon. Who wants to lead better should also be
familiar with the most important leadership function. A leader not only orders, but also
motivates, communicates effectively, resolve conflicts, and evaluates the school staff
(Pisoňová, 2011; Pisoňová & Nagy, 2014; Eger & Egerová, 2015). Farmer (2007) notes
that leadership is sometimes incorrectly identified by management. Management is a
broader concept than leadership. Leadership is one of the basic management functions.
For management, managers have to plan, organize, control, but also to keep people
focused on goals in what ability is one of the key characteristics of a manager. The
leader should use their power to lead people to work with enthusiasm in the interest
of the whole.
This ability can get the headmasters of Slovak schools through continuing education,
respectively functional training and management courses. We consider influencing and
conviction, i.e. persuasion, as a common dominant of leadership. It is the desire of
managers to guide the behavior of school staff in order to meet their own needs, as
well as of the school`s in which they work (Pisoňová, 2011, 2012). The object of
management is influencing people, namely individuals and groups. Leadership is the
frame by which managers influence others toward two separate but interrelated types
of activities, which focus on the role and on the person (Blake & Moutonová, 1987).
Person-centered approach in the management of school organization
Carl Ransom Rogers was an American psychologist and psychotherapist, a professor at
the universities of Ohio, Chicago, and Wisconsin. With Abraham Maslow, he belongs to
the most important representatives of humanistic psychology. He is the sixth most-
quoted author of the twentieth century. He promoted "the person targeted therapy"
(Person-Centered Approach), which studies the personality in an internal frame of
reference, which results in an emphasis on the view from the client's point of view. He
applied a combination of empathy (empathy), congruence (correlation) and reflection
(understanding, patient participate in the world). He developed techniques of
psychotherapy group (group meetings) focusing on releasing cultural tension (racial,
religious, social). He is also the author of the theory of personality centering on the
concept of "self". C.R. Rogers is related to phenomenology; he was also influenced by
existentialist philosophy. On the contrary, he was in opposition to classical
behaviorism, blaming enforced conformity, primarily because he held an optimistic
view of the natural ability of the body. That is, according to his psychophysical basis for
survival. Further, he considers that the conduct of a person is always motivated by
present needs (although past events can affect motivation), wherein there is a
tendency for so-called self-actualization. The central concept of "self", according to C.R.
Rogers was formed on the principle that the individual is willing to "accept for their"
part of his personality. This match between survival and awareness is called
congruence.
The bulk of the work of a school headmaster should be to control the workload. If all
the requirements with which the headmaster meets answer "yes", it is a signal
indicative of permanent overloading and stress. Moreover, it may happen that solving
498 Strategica 2016
continually less important role is preventing her/ him to fulfill the tasks of key
importance.
Frequent causes for expressing the consent of the headmaster against his/ her will and
conviction are the following reasons: s/he believes that declining is selfish; others
expect him/ her to be accepted; fears that the person to whom the headmaster refuses
will feel uncomfortable; s/he thinks that it is impolite to refuse; s/he feels guilty; s/he
thinks that would not be popular and so on. Based on the recommendations of B. Uhlig
(2008), we have formulated three arguments that could help a headmaster express a
negative opinion: the time of a headmaster is just as valuable as anyone else's time;
headmaster of a school has the right to deny the request and take responsibility for the
consequences; it should be appreciated that when expressed negative opinion, is not a
rejection of man, but his request.
The method of rejection depends on the type of temperament and other personality
traits of the headmaster. For this reason, Caunt (2007, pp.69-70) identified the
following three ways of refusal:
Aggressive approach: A person loudly complains that it is overloaded.
Timid approach: A person responds to the request "talking under his breath" with
efforts to delay the decision. S/he is leaving the applicant in uncertainty, regardless of
whether the answer is "yes" or "no."
Assertive approach: A person gives pleasure to the applicant who turns on him, but
clearly and politely explains why s/he cannot comply with the request. S/he suggests
other possible procedures and supports, able to give support to the person who finally
takes the role.
It is understood that the efforts of each school headmaster should be as much as
possible about the third approach. The requesting person clearly understands the
answer and the reasons for it, yet does not leave the meeting angry. The best way to
prevent such a situation is the respect of dynamic processes in the working group.
American psychologist Lewin, 1951, examines this matter (cited in Szarková, 1996,
pp.122-123), defining the nature of group dynamics as follows: "These are the processes
of formation and transformation of the working groups that are taking place in the
group at each time unit. It means the movement of groups from one developmental stage
to the next. In the frame of this movement are changing relationships between the
working group members, the position, and role of some members of the working group."
Related to formulating the rules in a group, specific psychological mechanisms are
important, respectively phenomena of group dynamics, such as peer pressure and
group cohesion. The phenomenon of group pressures among employees is known in
social psychology as conformism. It includes a person´s ability to comply with the
group - behave and act according to the norms, principles and values of the group and
its accepted goals. Based on the arguments mentioned by Szarková (1996), we believe
that a headmaster should initiate rules to respect the psychological aspects
distinguishing external from internal conformity. External conformity means that an
employee shares the collective views and standards only in appearance, in fact,
Management and Leadership 499
retaining his/ her opinion. Internal conformity is the result of overcoming the conflict
with the group in its favor.
Group cohesion lies in the relationships between members of a group that have an
emotional basis. Group solidarity can be expressed in the concept of consensus.
"Consensus envisages a consistent orientation among group members in relation to
certain important values for the group." (Newcomb & Hartley cited in Szarková, 1996,
p.123). In other terms, it means that based on a consensus, a psychological match, and
collective interplay in the working group is created. In reaching this effect, it is possible
to initiate a group of standards that envisaged under Newcomb & Hartley
(www.dps.tym.sk):
- Establishing clear rules that apply to all members of the working groups (e.g. the
headmaster and staff of the school);
- Establishing mechanisms of social control (the consensual adoption of rules generally
undergoes such spontaneous and non-directive control of its observance);
- Defying sanctions for violations.
In the application to the school, management practice could set social collateral
standards, specify as follows.
Establish rules and principles that apply to all school staff e.g. timely arrival to work,
timely arrival to class before school, during school hours, do not disturb, serious
educational problems with students to address jointly, and the likes.
An exact description of „what should who does“ so-called descriptive standards, but also
a description of „what is not acceptable“, so-called prescriptive standards. In school
practice, this function is included in the internal rules, which are discussed in detail in
the book entitled Competency Manager Profile in Educational Institutions by Pisoňová
(2011).
The mentioned process of cooperation creates conditions for building a favorable
climate in the school, which eliminates the violations, but particularly to create
conditions to ensure that the headmaster did not express rejection of the false claims of
their colleagues. In the case, when the headmaster despite the above-mentioned
measures will have to say 'no', it´s desirable to respect several principles. In the time
management to the requirement to express a negative opinion by the so-called
congruent messages, which can be learned and practiced. The success of its adoption,
in this case, is largely dependent on the ability of headmaster to facilitate personal
changes through the so-called soft skills which for the first time were defined by C.R.
Rogers, founder of humanistic psychology and non-directive psychotherapy. He
describes their principles in many of his books, for example: On Personal Power (1999),
A Way of Being (1998), Client-Centered Therapy (2000). In Slovak scientific and
academic circles, prof. Mgr. Eva Sollárová, Ph.D. acts as a successor of the person-
centered approach - PCA. She wrote a book on this subject entitled: Applications to
Person-Centered Approach (PCA) in relationships (Sollárová, 2005) and translated
memoir by Sternberg (2002) – the successor of Rogers called: Why Smart People Can
Be So Stupid?
Congruence enables the headmaster to be unique, an authentic figure who is well
aware of his/ her strengths and weaknesses and, consequently, can quite accurately
determine options and goals. A person with these qualities is eligible to send towards
500 Strategica 2016
his/ her surroundings so-called congruent messages, which eliminates the
manifestation of a negative opinion, the likelihood of defensive reaction of another
person. Condition for achieving the above-mentioned effect is that the headmaster
assesses the requirements, i.e. asked him/ her these questions:
- Is the requirement in my view, acceptable, realistic, specific and traceable? (under
rule SMART).
- Is it my priority?
- Do I want to do it?
- What would be the consequences of its refusal?
- Am I able to / and shall take (accept) these consequences?
Congruence can in this sense be mentioned as a philosophy of life that allows the
headmaster to remove time stress and to build effective relationships with co-workers
even if their views are contrary. Time management training implies, among other
things, to communicate information to clients about the importance of this skill (some
authors use the term competence) – congruence - for proper time management,
efficient operation of the team and learn the techniques so-called "Congruent News",
which modified the basic pillars mentioned by Pisoňová (Sollárová, 2005, pp.115-120):
1. Express one's opinion in the first person singular (not to hide behind someone else -
stand by one's decision).
2. Express one's opinion through one's emotions (e.g. I am not feeling good in this
situation ... I am interested in solving this problem ... Your statement touched me... etc.)
3. Not slander, insult or abuse partners. (e.g. Who do you think you are ...!, You are not
"ride" on my daughter ...!, I'll show you ...! etc.)
4. Constantly keep in the hands the "steering wheel", not to get pushed into the
background.
5. Use concrete arguments based on facts and substantiated claims.
This method achieves more relevant communication with the employees. S/he is
respected for her/ his honesty and transparency. S/he will have more time to her/ his
priorities and greater control over her/ his lives.
Creating a team-work by team roles
There are several classifications of team roles. Based on our own experience, we
consider the effective division of team roles according to Belbin (Belbin, 1981 cited in
Khelerová, 1995), which we also use in research. Given that this is a significant figure,
we show the characteristics of individual team roles.
The innovator is very creative, brings new thoughts and ideas often unconventional,
hates to be governed by instructions, working apart from other members of the team,
his/her thoughts may be radically unrealistic, strongly responding to criticism and
praise. Benefits for the team: s/he makes new proposals and stimulates new activities,
is the source of original ideas, s/he is able to solve complex problems, s/he forms the
initial phase of the project. Shortages and dangers: s/he problematically communicates
with the surroundings, the introvert is impractical, not looking to criticism.
The seeker of resources and opportunities quickly and enthusiastically responds, has
very good communication skills, does not have an original idea, but is able to
Management and Leadership 501
understand and develop the ideas of others, sees the opportunity in everything new,
needs the support and recognition of others. Benefits for the team: s/he is able to
attract new customers, to find new information, funds and so on, can recognize the real
from the unreal, builds, maintains and develops contacts.
Shortages and dangers: can be moody and impatient, quickly loses interest, is overly
excited.
The coordinator navigates others to achieve a common goal, is mature and self-
confident, recognizes individual talent and uses it in the interest of group objectives,
obtains the confidence of the other team members, has a wide view. Benefits for the
team: good results in teams with different skills, will maximize the potential of the
team, increasing the confidence of the team members. Shortages and dangers: s/he is
non-competitive, not too strong, may have conflicts with fittings, can be manipulative.
The former is highly motivated, has a lot of energy, is competitive and assertive, likes to
lead and force people into action. If s/he isn´t satisfied s/he could be excessively
emotional. Benefits for the team: s/he is the "engine", can handle obstacles and
complications, not afraid of unpopular measures, coordinates discussions and
activities. Shortages and dangers: the authoritarian and stubborn, lacking
interpersonal understanding, is aggressive, impatient, and argumentative.
The observer/ evaluator is serious, diligent, impartial, resists enthusiasm, is analytical,
able to reflect critically on the activities of the team, is rarely wrong. Benefits for the
team: can critically assess the effectiveness of the plan, is bright and has a good
judgment that prevents the hasty decision. Shortages and dangers: s/he is cold, clumsy,
overly critical, unable to inspire others, lacks imagination.
The kneader is friendly, sociable, gentle, a good listener, is interested in others,
understands their opinions, is flexible and can adapt to different situations and people,
is diplomatic and popular. Benefits for the team: creating an optimal atmosphere
prevents conflicts, has interlocutor effect, keeps morale, is responsive, provides
support to others. Shortages and dangers: the critical situation are undecided, to avoid
conflicts, s/he is less energetic.
The contractor is a practical organizer, changes unrealistic ideas feasible, the
methodology they like planning schedules and forms, responsible, committed to the
discipline systematically solves problems, willingness to make administrative
activities. Benefits for the team: it can apply the ideas, always do what is necessary,
and can organize a very complex activity. Shortages and dangers: it is uncompromising
and pedantic, inflexible, slow to respond to changes, lacks imagination.
The completer focuses on the details, s/he does not start anything s/he cannot
accomplish, not tolerant of ill-conceived solutions and inaccurate work. Benefits for
the team: presumes details of the project, ensures compliance with the procedures and
schedule outstanding precision in completing shares. Shortages and dangers: s/he is
stubborn, prone to exaggerated fears, hate delegates.
A specialist is an enthusiast for his profession, boasting professional knowledge and
skills, seeks to reach a high level of professionalism, defend their area of expertise, has
little interest in other people. Benefits of the team: delivering solutions, expertise
502 Strategica 2016
tasks, status, prestige team provides to the public. Shortages and dangers: lacking
interest in teamwork.
Based on these characteristics, the research has been carried out. It focused on
determining the distribution and representation of individual roles in teaching
collectives at primary and secondary schools in the Slovak Republic. In this way, we
investigated the effectiveness of functioning of labor collectives to address the
challenges requiring teamwork.
The methodology of empirical investigation
The aim of the research was to determine the strengths of the various team roles in
full-organized collectives of primary and secondary schools. In the research, we used
the author's testing method by I. Belbin, which focused on management and teaching
staff. Data was collected by the test method. We carried out the method of assessment
according to the requirements of the author. We used structured types of questions
with a choice of multiple responses. Respondents answer questions so that each
section is divided into ten points among the sentences, depending on the extent to
which they describe their behavior. In extreme cases, they can divide ten points among
all the sentences or ten points to allocate all the same sentence.
The research sample consisted of 451 managers and teachers in primary and
secondary schools in Slovakia. For distribution, we used the methods of randomisation.
In order to verify the validity and reliability of the research tool, pre-research was
conducted on a sample of 84 respondents. Subsequently, we made the correction of
each item of the questionnaire.
In the first table, we typed points on which respondents scored the capabilities of
individual issues. The second table contains the transferred data into columns and
counts the number of responses. The highest score shows the evidence of how the
leading and teaching staff can assert themselves in the team. The second highest score
expresses a backup role. Two lowest scores mean weakness.
For illustration, we use the results of one high school, which has a representative
character. Mentioned secondary school is a fully organized pavilion-type school. The
school cafeteria and gym-hall are part of the school. The school includes the school
campus, which includes handball and volleyball fields, an amphitheater for cultural
and social activities and school ground. The pavilion is a rest area with benches. The
total number of teaching staff is 20, of which two are in school management. All
teaching staff meets the qualification requirements for the performance of their duties.
Table 1. Respondents multiplicity of representative secondary school
Tests Employees %
Sent 20 100
Returned 20 100
Unfilled 0 0
Management and Leadership 503
Table 2. Answers of respondents
I II III IV V VI VII
10. 10 20. 48 30. 20 40. 50. 3 60. 70.
11. 21. 39 31. 25 41. 50 51. 10 61. 30 71. 35
12. 62 22. 51 32. 2 42. 20 52. 62. 72.
13. 10 23. 33. 8 43. 53. 6 63. 48 73.
14. 24. 34. 49 44. 54. 64. 74. 60
15. 58 25. 35. 2 45. 14 55. 32 65. 41 75.
16. 26. 20 36. 31 46. 56. 59 66. 76.
17. 27. 42 37. 10 47. 64 57. 67. 35 77.
18. 28. 38. 20 48. 58. 68. 46 78. 55
19. 60 29. 39. 33 49. 52 59. 60 69. 79. 50
Table 3. Answers of respondents
Figure 1. Data of representative secondary school
Quantitative analysis of the results
In that secondary school research, we found that the management and teaching staff in
the team know how to promote and unite specialists in the best way.
Two lowest scores that represent weaknesses school innovator is to generate new
ideas and incentives addressing labor activities. It is a source of original ideas, is able
to solve complex problems it forms the initial phase of the project. Whereas it is for the
present school unifies higher number compared to other roles, there is a risk delaying
504 Strategica 2016
the fulfillment of unpleasant and difficult task, as the uniting is characterized by
indecision and avoidance of conflict resolution. The former is highly motivated, has a
lot of energy is competitive, like lead and forcing people into action. The risks,
however, that he is too prescriptive, often doesn´t understand other school staff.
Another illustrative example is a primary school, which has a representative character
for our research. Currently, there is a 16-members team. The school has 10 classes
with 192 students and one special classroom of ICT. In this school, we preferred the
classic assessment of pupils.
Table 4. Respondents multiplicity of representative elementary school
Tests Employees %
sent 16 100
returned 16 100
unfilled 0 0
Table 5. Answers of respondents
I II III IV V VI VII
10. 20. 30 30. 15 40. 50. 60. 70. 20
11. 4 21. 37 31. 20 41. 40 51. 26 61. 71. 10
12. 43 22. 41 32. 42. 6 52. 62. 12 72.
13. 5 23. 33. 2 43. 53. 7 63. 45 73. 10
14. 24. 34. 45 44. 54. 64. 74.
15. 39 25. 35. 45. 5 55. 50 65. 20 75. 20
16. 20 26. 10 36. 38 46. 56. 28 66. 10 76. 10
17. 5 27. 39 37. 47. 59 57. 67. 30 77.
18. 28. 38. 48. 58. 68. 43 78. 50
19. 44 29. 3 39. 40 49. 50 59. 49 69. 79. 40
Table 6. Answers of respondents
Management and Leadership 505
Figure 2. Aggregated data of representative elementary school
Qualitative analysis of the results
Even in this school, the highest score achieved the uniting role, who is a good listener
and interested in others, s/he understands their views and can adapt to different
situations and collaborators. The main benefit for the team is its ability to create an
optimal atmosphere, to prevent conflict and has an impact interlocutor, is responsive
and provides support to others. As mentioned above, this role is characterized by
indecision, which may complicate the solution of tasks demanding.
The second highest score achieved the coordinator who is able to direct others
towards a common goal, is confident and mature, trusted by other team members and
has a wide view. A benefit for the team is that a well-coordinated team of people with
different abilities makes the most of its potential and increases the confidence of the
team members. The headmaster, however, constitutes a danger to the fact that this
type is often conflicting and manipulative to other school staff. School weaknesses are
the lack of observation / evaluation, is characterized by seriousness, prudence,
impartiality, alertness, possibility to make analysis and innovators.
Summary of research results
Figure 3 shows the aggregated data based on the statements of 451 respondents. They
formed their management and teaching staff of primary and secondary schools across
Slovakia. Research suggests that a balanced representation of the various team roles
has been recorded. The highest scores were registered for uniting role, specialists, and
developers. The lowest were represented by innovator and seeker resources and
opportunities.
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Figure 3. Aggregated research data in primary and secondary schools
Conclusions and recommendations for practice
The research shows that the process of selection and recruitment in schools should
take into account not only the professional profile of the teacher but also the character
and personality capabilities bidder for teamwork. This applies particularly to project
activities in schools. Every school needs an effective working team so as to implement
projects properly and on time. An efficient working team, however, is only the one who
possesses a balanced representation of all the necessary team roles. Otherwise, there is
a risk of disharmony and inappropriate school climate, which ultimately has a
significant impact on the image and reputation of the school.
The allowance refers to determinants that can facilitate, but also complicate the work
manager school. It is scientifically proven that to make it perform optimally and to
achieve synergy, several conditions should be fulfilled. Teams composed of members
characterized by similar features, behavior, style, attitudes and ways of thinking fail
surprisingly often. Effective working teams, by contrast, are characterized by accepting
different rearing the individuals that the team carries out different roles. The ability to
stop a role based on the values and attitudes of one person. Each member of the team
is able to perform a number of different roles. The team is optimal in the situation
when its members are able to cover all the necessary teamwork roles. Problems occur
when some important roles in the team are absent.
The fact that teamwork is very important for the prosperity of any organization was
confirmed again. But necessity is not only the right guidance to school staff but their
choice.
Acknowledgments: The study is part of the project KEGA No. 007UK-
4/2016 Preparation and development of terminology and explanatory
dictionary for school management, courses training and preparing
senior teaching staff, followed by supplementing its functionality in LMS
Moodle.
Management and Leadership 507
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Management and Leadership 509
THE ROLE OF CLASSROOM MANAGEMENT IN CONDITIONS OF
LOWER SECONDARY LEVEL OF EDUCATION IN PRIMARY SCHOOLS
IN THE SLOVAK REPUBLIC
Adriana NAGYOVÁ
Comenius University in Bratislava
3 Moskovská St., 813 34, Bratislava, Slovakia
nagyova@fedu.uniba.sk
Abstract. The issue of classroom management is relatively little known in the territory of
the Slovak Republic, and in our point of view, it is very important because it creates the
way for good teaching. In this paper, the author therefore theoretically and empirically
addresses issues of classroom management in conditions of the lower secondary level of
education in primary schools in the Slovak Republic. According to the fact that there is
not given sufficient attention to issues of classroom management within the
undergraduate teacher training, candidates are insufficiently prepared for the
performance of class teacher roles, they do not have adequate opportunity to become
familiar with workload before they start to teach. In this context, the paper will focus on
the analysis of classroom management, with an emphasis on competencies and skills of
the class teacher, which are essential for its successful implementation. The aim of the
research is to analyze the competencies and skills of the class teacher, which he/she
should dispose of in order to manage effectively a class. The research was carried out at
the lower secondary level of education (ISCED 2) in primary schools in selected regions of
Slovakia. The research sample consisted of class teachers at that level of education. In
order to evaluate our findings, we applied a quantitative research method. As a tool for
collecting research data, we used a specially designed questionnaire, containing 26 items.
Based on the data allowance author analyzes and evaluates information in relation to
the competencies that should class teachers dispose in order to the effective
implementation of classroom management. Based on the research findings, the author
formulates recommendations in relation to the management of schools and proposes
solutions for improving the work of classroom teachers themselves. The research carried
out to help school leaders improve the work of classroom teachers and help teachers to
adapt themselves to the role of class teacher.
Keywords: class teacher; classroom management; teacher competencies; the lower
secondary level of education; questionnaire.
Introduction
Effective teaching and learning cannot take place in a poorly managed classroom. The
importance of a quality classroom management is confirmed by the Ch. Eichhorn
study. Based on the research findings, it showed that the performance of students at
teachers with a high competence good management improves by up to a whopping 52
percent. The weaker teacher management approach can improve student performance
by 14 percent. The rate of effectiveness of education depends on the degree of success
510 Strategica 2016
of schools in meeting their educational goals. Effective teaching and learning cannot
take place in classrooms with low levels of classroom management (Jones & Jones,
2012; Marzano Marzano & Pickering, 2003; Van de Grift, van der Wal & Torenbeek,
2011). Without this, classes are disorganized and chaotic, and provide very little space
to learning processes are carried out (Elias & Schwab, 2006, p.309).
The results of many studies also confirmed that teachers play a key role in shaping
effective learning (Hattie, 2009). Given that within the undergraduate teacher,
education students are not given sufficient attention to the rights issue of classroom
management are poorly trained candidates for the post of class teacher, do not have
adequate opportunity to become familiar with the job description. In this context, the
paper will focus on the analysis of classroom management, with an emphasis on
competencies and skills by the teacher, which are essential for its successful
implementation.
The essence and the importance of classroom management
Management of the class is the first professional activity to be undertaken in the early
teaching career, and represents the most significant difficulties, especially for
beginning teachers (Zabalza & Marcelo, 1993). Numerous research efforts have shown
that the issue of management of classroom activities is the essence of concern, even for
an experienced teacher, and is a critical factor in what is predetermined (Doyle, 1977,
1979, 1981, 1986; Dreeben 1973; Emmer, 1987).
Authors Obdržálek and Horvathova (2004) aptly defined classroom management as
“Summary of activities a teacher, usually the class teacher, resides in the system
concept of organizing the conditions, processes and activities in the school room. It
focused attention in particular to coordinate the educational action of teachers and
educators on their interaction with the actors` extra-curricular education and training
and to guide the pupils collective.”
Evertson and Weinstein (2006) refer to the definition of class management as an
action of the teacher, which aims to create a favorable environment for academic,
social-emotional learning students. This strategy helps the teacher to control the class.
We understand them tools that teachers can use to create an environment, including
actions to improve teacher and student relations, and rules to regulate student
behavior. According to Corps (2008, pp.41-66), there are several strategies for
classroom management:
1. Create an effective learning environment - Classroom management is about creating
appealing and attractive environment for student learning. When all three skills sets
are present, you provide a positive classroom environment for student success.
Management and Leadership 511
Figure 1. Positive learning environment (Corps, 2008, p.13)
2. Establish classroom procedures - Teach procedures for routines in the classroom so
that the environment is predictable and well structured.
Procedure + Practice = Routine
3. Create a motivational environment.
4. Make every minute count - To maximize learning and teaching time
5. Keep everyone engaged - Challenging students to think actively involves them in
learning and develops critical skills. Expect both low and high achievers to participate
in classroom discussions and answer questions.
6. Teach life skills and good learning habits - As you work to create an organized
learner-centered classroom you can teach students many important skills. Sometimes
called character skills or life skills, these are the skills that enable students to become
mature, confident, and successful adults who contribute positively to their
communities and society as a whole. UNICEF and numerous ministries of education
recognize the importance of life skills training. The relative value of a life skill and how
the skill is expressed in daily behavior are culturally dependent. For example, most
Americans highly value initiative, effort, and curiosity, while other cultures may be
more likely to place a high value on respect, patience, and cooperation.
Based on the above, the concept of classroom management can be seen as:
- Management of classroom - a set of activities performed by the teacher in the
management of the educational process.
- Classroom management - within which attention focuses primarily on the classroom
manager - the function of class teachers, particular competencies, and skills.
The class teacher is irreplaceable in the process of management of the educational
process. Only that person is able to look objectively at the holistic educational progress
of each individual child. Partial view of the various teaching subjects and their
boundaries can and must balance the right class teacher, and compares the positive
sense of the word influence. The child may have vastly different results in individual
subjects, but also vastly different behavior or approach to subjects and teachers. It
must be acknowledged that the origin may not be with the child, and it is, therefore,
necessary coordination educational view of class teachers and activity (Trojan cited in
Pisoňová, 2014, p.71).
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Competencies and skills of the class teacher
Current conceptions of teaching competencies emphasize teaching aspect as an entity
in accordance with the requirements of the company. The role of teachers in society is
changing; the increasing importance of cultural and social skills, distinctive orientation
is the personality of the child. The importance of competencies of a class teacher,
teaching the correct diagnosis and the appropriate use of diagnostic methods. We are
talking about major class teacher competence, which we will discuss in this chapter.
Due to this fact, we investigated which competencies are necessary for the effective
implementation of class management and more we analyze them. Turek (2001, p.18)
highlights specific professional competencies that reflect the quality performance of
each profession. These are the same skills and competencies for effective
implementation of the profession. In the light of the above requirements, it is an
increasingly inflected requirement of professional development educator, who is also a
teacher. Pavlov (2013, p.23) understands the professional development of teachers as
a tool for the professionalization of teaching, permanent coping with changes, resulting
in a long-term impact on quality of education (Pisoňová, 2016, p.85).
Furthermore, the creation of teacher and school leader training programs, based on
required professional competencies, belongs to highly supported programs of National
Strategic Framework of all EU member countries, as each country wants to have their
teachers and school leaders prepared appropriately for their job (Pont, Nusche &
Moorman, 2008; Pont, Nusche & Hopkins, 2008). School leader training programs
should involve managerial, economic, personnel, legislative and other aspects, as these
aspects of the school management influence also the whole quality of education
processes carried out by schools (Bitterová, Hašková & Pisoňová, 2014, p.115).
Accurately grasp of the concept of competence can be found in the terminological and
explanatory dictionaries from the authors Obdržálek and Horvathová (2004), which
states: "Competence is a set of skills, competencies, powers and duties of a man, a
specialist organization's governing body, which is necessary for the job or function,
respectively the functioning of a body or organization. "The competencies also stated
in Act 317/2009 Coll - The teaching staff and specialists and on amendments to certain
laws, according to § 2 paragraphs. b) of the Act: “Professional competence is proven
capabilities required for competent performance of educational activities or qualified
exercise of professional activities. “ From the above, we suggest that every teacher in
our case, the class teacher should be during their studies of teaching subjects familiar
with each one of given competencies.
Own experience and practice should be made to improve the competence to ensure
effective implementation of the teaching profession. The issue of competence is mainly
engaged in Turek publications in Teacher Education for the 21st Century (2001, p.83).
Concisely list the types of competencies that should be every teacher at the university
acquired. It discusses the importance of each individual and provides the following
competencies:
- Professional and subject - thorough knowledge of the content of the curriculum
subjects which the teacher teaches.
- Psycho-didactic - creating favorable conditions for learning - motivation of students;
activation of their cognition, thinking, creation; creating a favorable social, emotional
and working atmosphere; manage the process of learning that is oriented individually
Management and Leadership 513
to each student; optimal choice of methods, resources, organizational forms of
teaching.
- Communication - the ability to communicate effectively with students, parents,
colleagues, superiors and the social partners.
- Diagnostic - analyze and timely detection of problems of students; fair and objective
evaluation of the educational performance of students.
- Organizational and management - planning and design teaching; maintain order and
system in the classroom.
- Advisory and consultative - as an adviser for students to solve problems, not only
study.
- Reflection of own work - evaluating their own work in order to improve the future.
When we think of each one competency, we will realize that being a teacher is not only
to teach. Teaching profession consists of several teaching roles (Figure 2).
Figure 2. Roles of the classroom manager (Pisoňová, 2014, p.61)
Research methodology
The aim of the research was to analyze the competencies and skills by the teacher, who
should possess the effective implementation of classroom management. The research
was carried out at the lower secondary level of education (ISCED 2) in selected regions
of Slovakia (Bratislava, Orava). We chose a quota sample (intentional) the selection of
the survey sample, as our criterion for the choice was up to date features class teacher
at the lower secondary level of education. The research sample, therefore, consisted of
class teachers at that level of education.
Table 1. Research sample
Research participants Region Total number
Class teachers of ISCED 2 Bratislava 40
Class teachers of ISCED 2 Orava 47
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The identification of the sample of the survey, we focused on issues that investigated
sex, whether a school is in a village or in the city, the length of the performance of the
class teacher, classroom teachers' age group and last but not least we were interested
in and graduating specialists. At the Bratislava and Žilina region and in female-
dominated (85 % of Bratislava, 89 % of Orava). Given the number of respondents was
not reached in our study sufficiently a representative number of teachers from villages
and towns. From Bratislava, they responded only teachers from the city, of Orava,
engage mainly teachers from the villages (63%). The largest percentage of classroom
teachers in Orava performs the function ranging from 11 to 20 years of experience
(31,91%). From Bratislava, it is the range of 0-5 years (32,50%). Orava highest
percentage of teachers comprises over 51 years (35%), and in Bratislava, the teachers
are in the range 31-40 years (44,68%). Respondents in most cases coincide. The most
numerous group consisted of graduating aprobácia languages - English, German,
Russian and French. Another large group was teachers of mathematics, Slovak
language, biology, chemistry, and physics. Especially in Orava, some teachers have
graduated from religion, which was mainly attributable to strong religious belief in
Orava.
To evaluate each observation, the use of quantitative research methods in which we as
a tool for collecting research data used a specially designed questionnaire containing
26 items. In the questionnaire, we used closed items, which offered ready-made
answers. For some items, the ability of multiple choice. We used the open items of
which we have tried to establish a subjective opinion. These questions we chose very
little, given the scale of the survey sample. Most of the items in the questionnaire
contained semi-closed items that offer choice answers, and we offered the choice of the
open end. The respondent can choose either one of the offered alternatives or continue
writing your reply. In the questionnaire, we used a system of scale type questions with
answers in the five-point numerical range. Variants, we define the "least important" to
"most important" value and frequency variant "never" to "always".
The obtained data were analyzed and evaluated through the answers to the research
questions. Given the potential magnitude of the contribution, the author presents the
interpretation of selected parts of the research findings. The main finding of the
research findings with the remit research question:
What kind of responsibility prevails for classroom teachers?
Respondents were asked two questions to measure the importance of individual
competencies in the first question, respondents were addressed to indicate the order
of importance of the values ranging from numbers 1 through 5, the competence with
which it should enjoy the class teacher (professional and subject competence, psycho-
didactic, communication, diagnostic, organizational and management, advisory and
consultative, reflection of own work). The second question contained the same
alternatives, with the difference that they attributed value in its sole discretion,
respectively. Which competencies they themselves consider important or less
important. In most cases, the answer to both questions coincides, but there were also
differences. Of all the responsibilities that we theoretically explained, class teachers
most highlighted communication competencies (Orava – 68%, and Bratislava – 80%),
organizational (Orava – 45%, Bratislava – 55%) and reflections on their work (Orava –
49%, and Bratislava 53%). When a working class teacher is important to have acquired
Management and Leadership 515
communication skills, particularly in relation to pupils, other teachers who work in the
class and parents, organizational abilities and skills again in relation to the effective
implementation of classroom management. With the appointment of competencies is
closely linked competence reflection of their own work. We asked respondents the
reflection in schools and many have indicated that this is an excellent tool for
introspection and improvement is. Therefore, we attach great importance reflection of
the effective functioning of the educational process and the classroom management.
The lowest degree of importance attributed class teachers to professional and subject-
specific competencies (25 % of the value of the number 5). Nearly 1% of the people
interviewed stated at values ranging 1, the psychosocial and psycho-didactic
competencies. Significantly above responsibilities between them are relevant and
necessary in carrying out work with people. Significant differences between the
answers of respondents in Bratislava and Orava occurred during the evaluation of
psycho-didactic competencies. Class teachers from Bratislava values shown
competency 22% greater degree of importance than class teachers from Orava. On the
contrary, psychosocial assessed class teachers from the Orava higher degree of
importance of values ranging numbers 4, 10% more than class teachers from
Bratislava. In connection with the powers, we specifically pay attention to diagnostic
skills. Counseling and diagnostic competence of respondents indicated the importance
of values and assigned the number 5 and 40% consulting and diagnostic 34 %. Given
the findings, we see considerable limits on the acquisition of competencies. Class
teachers have problems with the proper diagnosis of the pupil, whether the use of
adequate instruments or in collaboration with parents to further our understanding.
Research question: How does the class teacher realize a diagnosis of students, we
concluded that the most common methods include observation (on average 86% of the
respondent classroom teachers) and interview (93% of respondents). Other methods
of diagnosis such as history, sociometry, questionnaires and surveys, class teachers are
used to a lesser extent, or not at all.
What interventions can implement the class teacher to improve their skills?
Class teachers attach great importance to their capacity, thus we do not see a reason
for underestimating feature class teacher. The amount of work performed by class
teachers, calls for admiration and increasing the class teachers together with the
implementation of changes to improve the work. First, we would like to recommend a
school psychologist as an expert advisor in the educational problems of pupils in
situations of stress for teachers, but also in their personal growth. We conclude that
based on the data collected from respondents at their disposal expert advice, especially
school psychologist. We met with the views of teachers who would appreciate the
advice and experience of their colleagues and school administration (17,43 % of
respondents). We would, therefore, propose that the teachers and class teachers with
each other more inspired, listened, and offered a helping hand and personal experience
to their colleagues. The next step is to improve self-assessment of its work by the
teacher. Reflection and self-reflection are tools that are used to close the gaps and to
deepen the substance of the values and qualities. Know yourself, your strengths and
weaknesses are a step for the better. Bounce back from their strengths, build on them
and try to change, reduce weaknesses. If they do not know yet, hardly we will move
somewhere further. Reflection of own work is, therefore, an important element to
meeting the educational and training objectives. The answers that we have obtained
516 Strategica 2016
through a questionnaire, in most cases, coincide. They have been associated with these
competencies. Closest possible we might have noticed in the organizational
competence. Respondents who reported a high level of importance wrote one of its
strengths organizational skills. In most prevalent communication and psychosocial
competence. Teachers who practice range from 20 to 30 years, noted as a strength of
years of experience and practice in the field. Otherwise, teachers, ranging from 0 to 5
years of experience mainly attributed to weaknesses in the teachers' lack of
experience.
The biggest pitfall of the teaching profession, teachers especially are given time. 68%
of respondents in their particular weaknesses reported a lack of time and too busy
with different activities. About how important the feedback from the teacher’s work is,
we have already mentioned. Therefore, we asked respondents whether there is on the
school self-assessment of its work by the teacher. We found that 37 % of the teachers
attended the school self-evaluation. This means that 63% of respondents rating school
does not implement its own teaching staff. Unfortunately, after analyzing the data
obtained, we found that the root of the problem is in the management of schools. Due
to this fact, respondents who have never participated in school self-evaluation
indicated that it would like to participate. Only slight 2% of teachers indicated that
although he never participated, present so wish. The experience of teachers who
participate in an annual self-evaluation, showing efficient work by the teacher,
collaboration between colleagues and senior managers. The most common methods of
self-evaluation, respondents reported questionnaires and personal interviews with
senior managers, self-reflection, and various meetings or lectures.
What options has the class teacher to improve the quality of classroom management?
To improve the quality of class management must take into account the possibility that
a class teacher available. Through the acquisition of data, we found that approximately
17,43% of respondents said their colleagues and school leaders as one of the
alternatives to the improvement of the functioning of the class management.
Respondents also indicated as an aid in the function of the experts, 10% of them said
even in this issue help school psychologists, special education teachers, educational
counselors and other professionals as an opportunity to improve the quality of class
management.
Other alternatives were presented in the notice classroom teachers predominated
introspection classroom teachers (5,34%), analysis of school management (3%), self-
study through literature (7,25%).
With which restrictions, the class teacher meets at improving the quality of class
management?
Pitfalls and limitations accompanied the teaching profession, recorded and addressed
respondents. The main sources of class teachers see the parents (27,50 % in Bratislava
and 14% from Orava). Establish and maintain a positive relationship with the parents
of students is often very strenuous. Most parents have different ideas about the quality
of class management and are not always in conformity with the class teacher. Effective
classroom management is made and the good relations between students and
classroom teachers. 34 % classroom teachers see improvements in restrictions on the
Management and Leadership 517
lack of time in getting to know individual students in the classroom. 11,35 % from 34%
as previously mentioned language teachers who do not have much time for exploring
the students during the teaching process. They noted that during classroom hours are
not enough opportunities for exploring relationships in the class interests of pupils
and evaluation of the atmosphere in the classroom. On the other hand, 7% say that the
problem may also be the pupils themselves and their unwillingness to collaborate with
classroom teachers.
Based on the research findings, we formulated the following recommendations in
relation to the management of schools and propose solutions for improving the work
of classroom teachers themselves:
- The need to strengthen enhanced in communication, organizational competencies and
reflections on their work.
- On diagnostic competence recommended in good diagnostic methods applied and others
- such as case history, sociometry, questionnaires, and surveys.
- The need to strengthen self-evaluation in schools.
- The need to direct the work of school psychologist in schools.
- Mutual assistance of colleagues, experts and parents.
Conclusions
International research shows that no other parameter of classrooms is not so clearly
and firmly connected with the performance levels of performance and progress as a
management of a class (Helmke, 2003, p.78). Efficient management of a class is a
precondition for demanding to teach. Effective implementation of classroom
management is closely related to competencies and skills of the teacher, who should
possess. Change established ways and methods of work, which we believe to be
correct, it is not an easy process. To develop the required competencies and skills as
the implementation of innovations, it is necessary to create favorable conditions and
provide support from the school management, parents and the pupils themselves. The
research carried out has, therefore, help school leaders improve the work of classroom
teachers and help teachers to adapt themselves to the role of class teacher.
Acknowledgments: The contribution was created as a part of the
solution the project KEGA No. 007UK-4/2016 Designing and
development of terminology and explanatory dictionary of school
management for teacher training courses and school management staff
training followed by supplementing its functionalities in LMS Moodle.
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Knowledge Management and
Innovation: from Soft Stuff to Hard
Stuff
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 521
INTEGRATING INSTITUTIONAL THEORY WITH MARKET
ORIENTATION TO STUDY SMEs IN TRANSITION ECONOMIES: A
CONCEPTUAL MODEL
Kathleen WELSH VOGES
Texas A&M University-San Antonio
One University Way, San Antonio, TX 78224, USA
kvoges@tamusa.edu
Daniel GLASER-SEGURA
Texas A&M University-San Antonio
One University Way, San Antonio, TX 78224, USA
dglaser@tamusa.edu
Abstract. The presence of a market orientation is a universal concept which defines the
extent to which a customer focus is evident in organizational practices and culture. The
concept has been examined extensively in for-profit entities in developed economy
settings and has also been found to be of value in transition economies. We contend that
transition economies are by definition in a state of change at the institutional level and
that this changing dynamic is significantly influential on organizations embedded in its
context. However, although noted in previous research results, the inclusion of
institutional drivers in market orientation models has not been well developed. This
paper presents theoretical and research-based support for a conceptual model which
includes the address of relevant institutional drivers of an organization’s development
and presence of a market orientation. Given the important contributions of SMEs in
transition economies, we focus our discussion on this organizational type. Specifically, we
present a conceptual model and eight propositions suitable for a comprehensive research
agenda of SMEs in transition economies. The propositions present that a significant
relationship exists between the extent to which institutions support market orientation
practices, and management’s recognition and emphasis of market orientation in an
organization. We also propose that market-oriented governance and the embrace of a
market culture in an organization provides additional support for the presence of market
orientation.
Keywords: market orientation; transition economy; institutional theory; SMEs;
organizational change.
Introduction
The presence of a market orientation in an organization is based on the competitively
strategic participation of its actors across all functional areas to identify and address
customer needs (Day, 1994). A market orientation presence has been found to be
positively related to organizational performance (e.g. Kirca, Jayachandran & Bearden,
2005; Jaworski & Kohli, 1993; Slater & Narver, 1994). The research stream over the
past 25 years includes the exploration of its presence in multiple organizational forms
including for-profit, not for profit and public sector organizations, as well as diverse
522 Strategica 2016
economic settings (Barberis, Boycko, Shleifer & Tsukanova, 1996; Kirca, Bearden &
Roth, 2011). And, while there are variations of the model (Deshpandé, Farley &
Webster, 1993; Kohli & Jaworski, 1990; Narver & Slater, 1990), the common
presentation is a relationship between key internal antecedent conditions such as
leadership, and organizational dynamics and systems, and the presence of market
orientation (Kirca et al., 2005; Lancaster & Velden, 2004). That is, the focus has been to
identify what internal conditions lend toward the presence of a market orientation.
Not surprisingly, as is the case with the development of any research stream, the
market orientation literature also presents noted shortcomings. Kirca et al. (2005)
encourage a better understanding of how market orientation antecedents interact by
way of exploring contextual differences. There is also a lack of longitudinal study which
leads to the inability to capture the dynamics of change (Gebhardt, Carpenter & Sherry,
2006), as well as an absence of theory development which considers the role of
external environment conditions in developing a market orientation (Gebhardt et al.,
2006; Qu & Ennew, 2005). While external environmental conditions in an established
market driven economy may not be a significant driver in the development of a market
orientation, as suggested by Qu and Ennew (2005) organizations in transition
economies may have a greater sensitivity to external conditions as there is a shift from
a centrally planned to a market-oriented economic structure (World Bank, 2016).
The prominence of business organizations operating in transition economic settings,
which account for one-third of the world’s population, has increasingly played an
influential dynamic in global trade (World Bank, 2016). The transition is exemplified
through the implementation of privatization agenda emphasized during the later
portion of the 20th century and continuing into the 21st century (Althaus, 2016; Desai
&Wheeler, 2016; Ramamurti, 1999). Tushman, Newman, and Romanelli (1986)
describe privatization as a “frame breaking” change strategy, while Ramamurti (2000)
presents that successful privatization is dependent on factors such as the quality of
market-supporting institutions which are simultaneously in a state of flux. These
conditions suggest that the state of external institutional level drivers may be of
particular interest to enrich understanding of a market orientation in organizations
embedded in this context. Further, sensitivity to institutional level changes in
transition economies may be especially relevant for small and medium-sized
organizations (SMEs) which oftentimes do not enjoy a continuation of state subsidy as
compared to larger more monopolistic organizations, but are found to be the main
competitiveness generators ( e.g. Ahrend & Martins, 2003; Mackic, Peric & Soric, 2014;
McIntyre, 2001). Thus, the purpose of our paper is to present a conceptual research
model focused on SMEs in transition economies.
Given a gap in theoretical development, we consider using a middle range theory
approach. In particular, we consider the meta-analysis findings of Kirca et al. (2005)
for relevant perspective derived from market orientation literature, and the
presentation of Greenwood and Hinings (1996) for relevant external environment
perspective derived from institutional theory. Specifically, our presented conceptual
model and eight propositions are intended to provide a research agenda platform to
examine the influence of external institutional drivers of the presence of market
orientation in an organization by addressing the following questions 1) How do
relevant external institutional drivers impact the development of a market orientation
in a transition economy SME?, 2) What is the relationship between relevant external
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 523
institutional drivers and internal antecedents of market orientation in a transition
economy SME?, and 3) What is the relationship between key inter-organizational
constructs and the presence of a market orientation in a transition economy SME?
We begin our discussion with a literature review of market orientation theory. We
then present a brief discussion of relevant institutional theory perspective integrated
with the prevailing market orientation model as the basis for the presentation of eight
propositions. We conclude with a brief discussion of how the model would be applied
to a comprehensive research agenda.
Literature review
Market orientation theory
For-profit organizations typically focus attention and activities on customers to gain
competitive advantage, and thus market orientation became the basis for the
development of marketing thought (Tworoger, Voges & Barnes, 2010). Over time
market orientation has gained prominence as an approach which can be beneficial
when embraced by the organization as a whole (Slater & Narver, 1994). Multiple
perspectives of the market orientation construct have been presented (Kirca et al.,
2005). Market orientation was conceptualized as a three-dimensional behavioral
activity comprised of intelligence generation, intelligence dissemination and
responsiveness to market conditions (Kohli & Jaworski, 1990). It was also
conceptualized as a culturally derived concept oriented toward both customer and
competitors in the market (Narver & Slater, 1990). Market orientation has also been
identified as an effective cultural form acting as an element of cohesion in
organizational performance (Gebhardt et al., 2006; Narver & Slater, 1990).
Studies of market orientation have included frameworks which address its
relationship with antecedents, organizational outcomes, and moderating conditions.
Jaworski and Kohli’s (1993) frequently cited model tested the relationship of a multi-
dimensional market orientation construct (Kohli & Jaworski, 1990) with three
categories of antecedents, 1) top management, 2) organizational systems, and 3) inter-
departmental dynamics. Their work along with others produced mixed support for the
moderating impact that external factors of environmental turbulence, competitive
intensity, and technological turbulence can have on the relationship between market
orientation and performance (Kirca et al., 2005). Further, the meta-analysis provided
for differences in the strength of the market orientation – performance relationship
depending on the types of measures used, the type of firm, and cultural context of
employees.
As anticipated by Kohli, Jaworski and Kumar (1993), extensions of market orientation
studies to less traditional business settings (i.e., non-profit and public sector,
transitioning economy nations) indicate that market orientation is also a viable
construct related to these organizations’ performance. Vazquez, Alvarez, and Santos
(2002) found that a market orientation is present in a Spanish non-profit organization
although there was a noted need for a modified market orientation scale to capture the
differences in non-profit outcome focus as compared with for-profit organizations.
Likewise, Balabanis, Stables and Philips (1997) and Cervera, Molla and Sanchez (2001)
524 Strategica 2016
found the presence of a market orientation in non-profit organizations. Kok and
Driessen (2012) found in their study of the transition from public to private sector
operation of Dutch housing associations that the most important antecedents
associated with the presence of a market orientation are related to the change capacity
factors of 1) process improvement control and 2) top management emphasis. And,
Barberis, Boycko, Shleifer and Tsukanova (1996) identified the presence of a market
orientation in privatized Russian organizations.
Qu and Ennew (2005) explored the development of market orientation in the
transition economy China and concluded that although actions of managers in these
organizations are relevant, the more influential is the external conditions found in
governmental policy regulations which support product quality and customer
protections, as well as market-based ownership structure. Li, Sun, and Liu (2006)
applied institutional theory to capture the role of government control and the
transition to formalized corporate governance of state-owned enterprises in China and
found a relationship between market orientation and organizational performance.
Farley and Deshpandé (2005) in their study of the presence of a market orientation in
Russia noted that while both China and Russia have undergone economic transition,
the extreme and long-term central planning systems in Russia and higher degrees of
political uncertainty at the time of their study contributed to findings that the presence
of market orientation is weaker. Stan, Boush, Barb and Sebastian (2006) consider the
potential inability of customer’s skills to effectively appreciate a market orientation in
transition economies because of the insufficient supporting institutional frameworks.
Kirca, Bearden, and Roth (2011) examined the presence of market orientation
implementation in global subsidiaries of U.S. companies and found a positive
relationship between the subsidiary’s level of market orientation and company
headquarters. They found a positive relationship between the subsidiary’s level of
market orientation and market-supporting institutions in its host country. They also
found that subsidiary manager’s identification with headquarters positively
moderated the strength of the relationship between the host country’s market
supporting institution and the subsidiary’s market orientation. Further, they found
that the greater the cultural distance between the home country (U.S.) and the host
country the more accentuated the role of the host country’s market supporting
institutions to the presence of the subsidiary’s market orientation. The study offers an
insightful illustration of the complex impact that external global conditions can have
on the presence of a market orientation in an organization.
Studies have also tested the validity of the two most popular instrument scales used to
measure the presence of market orientation in an organization (Ellis, 2006; Rojas-
Mendez, Kara & Spillan, 2006; Ward, Girardi & Lewandowski, 2006). The MARKOR
scale follows the market orientation model of Kohli, Jaworski and Kumar’s (1993)
instrument (i.e. intelligence generation, intelligence dissemination and
responsiveness), while the MKTOR scale follows the market orientation model
developed in 1990 by Narver and Slater (i.e. customer orientation, competitor
orientation and inter-functional coordination). As surmised by Roersen, Kraaijenbrink
and Groen (2013) although the market orientation concept has universal potential,
most research has been conducted in developed economies with established free
market business environments suggesting that modification of survey instruments to
recognize knowledge limits in understanding the market orientation concept in
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 525
transition economies would be beneficial. In all, informal institutional contextual
settings such as culture, as well as formal institutions are seen as critical in the ability
of an organization to identify and address market needs (Webb, Ireland, Hitt, Kistruck
& Tihanyi, 2011). Thus, we contend in transition economies there is credible evidence
to argue that external institutions, as well as cultural and knowledge tendencies
toward the value of market-oriented practices are significant influences on the
presence and development of a market orientation in an organization.
The role of institutional context
Although a full discussion of institutional theory is beyond the scope of this paper, the
initial orientation of the theory was toward answering the question, “why are
organizations the same” (e.g. Di Maggio & Powell, 1983). There is an underlying
assumption that organizations adapt in order to survive (e.g. D’Aveni, 1994). The
primary focus of the theory’s tenets is on relevant institutional level context infusing
values and beliefs (i.e. ideological templates) into organizational behaviors (Meyer &
Rowan, 1977; Meyer, Scott & Deal, 1983). The process of adoption evolves from
acceptance of the legitimacy of the institutions (e.g. government and regulatory
agencies, professional associations) to subsequent mimetic and isomorphic behaviors
which evolve to converge into acceptable organizational behaviors (DiMaggio &
Powell, 1983). Over time, institutional theory applications have advanced to also
consider, “what occurs when there is institutional level change?” (e.g. Greenwood &
Hinings, 1996). Interest shifted to consider the impact of the type of institutional
change, as well as the pace and scope of the change effort. Two types of change were
identified, 1) radical: a significant shift from one institutional template to another, and
2) convergent: a less abrupt shift within the same institutional template. The scale and
pace of change addressed the period of upheaval and adjustment to new conditions
and is characterized as ranging from revolutionary: wide and fast change, to
evolutionary: narrow and slow change. In our discussion we are focused on radical
change as we contend that in transition economies there is a “frame-breaking” shift
from one institutional template to another; namely a shift from a centrally planned to a
market-oriented structure.
Greenwood and Hinings (1996) broached the topic in response to recognition of the
complexity of political and regulatory institutional changes in current environments.
As such, they specifically addressed the impact of radical change resulting in a break
up of interpretive schemes used to assess an organization’s context; that is they
presented that “… organizations are structures which are institutionally derived.”
(Greenwood & Hinings, 1996, p.1028). They proposed that change may vary across
institutional sectors due to the extent to which the sectors are coupled and/or are
insulated from ideas practiced amongst sectors. Further, inconsistent cues across
sectors are also seen as creating the potential for variation of organizational behavior
in the sector. Finally, the incidence of radical change and pace of change may vary
within institutional sectors because organizations vary in their internal dynamics;
namely, there may be resistance to change.
Their process model delineates the adoption and practice of related behaviors as
organizations change their organizational templates based on prevailing institutional
context (in contrast with past institutional context). Specifically, while organizations
are embedded in the same dynamic institutional context leading toward an isomorphic
526 Strategica 2016
need to change in order to survive (Oliver, 1991), organizational differences in
precipitating and enabling conditions lend toward different organizational responses.
If the prevailing template is recognized as an advantage by actors within the
organization a shift to this template is likely to occur. If power structures, namely
executive action within the organization support the new behaviors, the culture will
ultimately change. Over time, reciprocal exchanges lead to enforcement of mimetic,
normative and coercive processes within the prevailing institutional context
solidifying the change experience. Greenwood and Hinings (1996) contend that in the
early phase of institutional change the technical aspects of the change are more
important; and, over time institutional pressures become more prominent.
Seo and Creed (2002, p.224) further develop a theory on the impact of institutional
change and provide a clearer focus on “when and how embedded actors individually
and collectively come to the conscious point…where they recognize the need… for
collective action to change existing institutional arrangements”. Recognizing the
complexities and inconsistencies of social behavior patterns, they argue that the
change process results in a praxis defined as “… a particular type of collective human
action, situated in a given social-historical context, but driven by the inevitable by-
products of that context -social contradictions” (Seo & Creed, 2002, p.230). That is,
although institutional change may occur, the outcome may not be what is intended
because of the inability for fundamental realignments in frames of reference and logic
for action. This conundrum is proposed to be particularly relevant in transition
economies where the organizational template may not know by its actors and a
‘learning effort’ is required. In the absence of suitable institutional templates to mimic,
actors may resort to old known routines for behavior (Newman, 2000).
A conceptual model and propositions
The following discussion presents an argument for eight propositions which reflect an
integration of relevant institutional theory perspective with the market orientation
model validated by Kirca et al. (2005). Figure 1 is an illustration of the model. In brief,
the model recognizes the relationship between relevant institutional context and the
process of developing a market orientation in an organization as portrayed by
relationships between key actors, organizational dynamics, and organizational
systems. The model integrates three main points from institutional theory. First, in the
external environment, as suggested by Greenwood and Hinings (1996) there is the
presence of multiple vertically and cross- integrated institutional sectors, namely, 1)
regulatory, 2) professional support and 3) political which provide cues and basis for
the legitimacy of a new archetype or organizational template. When these sectors, in
which organizations are embedded present consistent favorable market-oriented
characteristics it is expected that a positive environmental setting exists for change to
a market-oriented archetype (delineated as ‘new archetype”). Second, given that the
new archetype is considered to be legitimate (which assumes that the old archetype is
considered not to be legitimate) there will be a precipitating dynamic of market
orientation recognition by top management in the organization (Greenwood & Hinings,
1996). That is, top managers serve in an initiator role to foster the development of a
market orientation in an organization. Further, as discussed by Seo and Creed (2003)
and Newman (2000), we propose that the recognition of a market orientation is the
result of a learning effort or adaptive response by top managers, who are primarily
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 527
responsible for the survival of the organization. If the cues from the institutional
sectors are confused or obscure the ability for top manager recognition is hindered,
and the potential for the organization to develop a market orientation is diminished.
Thus, we present the following four propositions for consideration:
Proposition 1: There is a positive relationship between a country’s market orientation
regulatory policies and an organization’s top management’s market orientation
recognition.
Proposition 2: There is a positive relationship between a country’s market orientation
professional support institutions and an organization’s top management’s market
orientation recognition.
Proposition 3: A country’s political uncertainty negatively impacts the relationship
between a country’s market orientation regulatory policies and an organization’s top
management’s market orientation recognition.
Proposition 4: A country’s political uncertainty negatively impacts the relationship
between a country’s market orientation professional support institutions and an
organization’s top management market orientation recognition.
We also propose a precipitating condition within the organization’s dynamics. That is,
the potential of resistance toward change to a market orientation can be assessed
based on the extent to which actors throughout the organization value a market
culture. Greenwood and Hinings (1996) assert that if actors within an organization are
supportive of the status quo, change to the new archetype will not occur. This is
especially relevant for SMEs in transition economies. Research indicates that cultural
distance from developed economy settings challenges the ability for an understanding
and acceptance of market orientation practices (e.g. Kirca et al., 2005). Given that
market orientation by definition embraces an organizational-wide presence we include
this perspective in the model. Thus, we present the following proposition for
consideration:
Proposition 5: An organization’s market culture is positively related to its market
orientation
Third, as the potential for embracing a new archetype is supported through
precipitating dynamics, enabling dynamics are also engaged to provide an ability to
successfully implement the new archetype. In this regard, an organization’s
governance structure is considered to be an important source of enabling dynamic by
providing support for a capacity for action by way of providing market-oriented skills
and resources (Greenwood & Hinings, 1996). We propose that top management is the
point that market orientation recognition and supportive governance converge. This
convergence is proposed to unleash the potential for a market-oriented emphasis; a
construct identified in the traditional market orientation model. Further, as top
management plays a significant role in the organization’s cultural orientation (Schein,
1985) we also propose that there is a subsequent shift to a market-supporting culture
throughout the organization. Thus, we propose the following three propositions for
consideration:
528 Strategica 2016
Proposition 6: The market-oriented governance of an organization is positively related
to its top management market orientation responsiveness.
Proposition 7: The top management market orientation responsiveness is positively
related to top management market orientation emphasis.
Proposition 8: The top management market orientation emphasis is positively related
to the organization’s market culture.
In summary, our conceptual model and eight propositions are intended to present that
when there is a positive gain in each of three arenas (i.e., (i) market orientation in
institutional sectors, (ii) market orientation antecedent conditions in the organization,
and (iii) capacity for change to a market orientation) the result is a
development/presence of a market orientation in the organization. Our focus in this
discussion has been on SMEs in transition economies. However, we consider that these
external institutional drivers may be influential in any economic setting undergoing
change.
Figure 1. Market Orientation in Transition Economy SMEs: A Conceptual Model
(propositions are shaded)
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 529
Conclusion
We suggest that the next stage of the study is the development of a comprehensive
research agenda. First, given that mid-range theoretical approach in the development
of the model and the lack of direct empirical study, we suggest that the first phase of
study employ a qualitative investigation. For example, exploring with open-ended
question format the potential existence of ‘market ignorance’ as raised by Roersen et
al. (2013), as well as exploring the role of supporting professional organizations in
constrained regulatory and political settings as noted by Kshetri (2009) would be of
value.
Second, although not directly presented in the model, we propose that while all
organizations in transition economic settings experience radical change, each would
experience differing levels of revolutionary/evolutionary change contingent upon the
timing and relevant political and economic agenda. Further, as suggested by
Greenwood and Hinings (1996) the potential for successful change may vacillate
between emphases on the technical aspects of institutional conditions in the early
stages of transition to an emphasis on institutional pressures to promote isomorphic
behaviors in later stages. Also, as observed by Kirca et al. (2005) relevant industry
sector characteristics (i.e. manufacturing vs. service) may impact the level of a market
orientation. Thus, we suggest that careful consideration of controlling for county level
and industry level contingencies be employed.
An organization’s archetype is derived from its associated external institutional
environment (Greenwood & Hinings, 1996). The ability for an organization to survive
is predicated on its ability to adapt to oftentimes changing contextual forces (D’Avini,
1994). Organizational actor responses may vary depending on which institutional
context they are aligned with, and to what extent they are coupled with their
institutional context. We contend that especially in transition economies there is by
definition a radical or fame breaking change as seen by shifts in support of
organizational archetypes by key institutional sectors. We acknowledge that SMEs are
pivotal in not only their success but also the success of transition economies of which
they are a member.
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Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 533
ENSURING THE COMPETITIVENESS OF HIGH-TECH INDUSTRIAL
ENTERPRISES AND THEIR ROLE IN THE INNOVATION ECONOMY
Natalia POLZUNOVA
Vladimir State University
79 Gorkogo Street, Vladimir, Russia
natalya.polzunowa@yandex.ru
Tatiana STARIKOVA
Vladimir Branch of the Russian Presidential Academy
of National Economy and Public Administration
59a Gorkogo Street, Vladimir, Russia
startv008@rambler.ru
Abstract. The innovative trajectory of the country development requires a competitive
sector of high-tech industrial enterprises. Competitiveness is seen as an essential
emergent property of the high-tech industry and depends on many external and internal
factors. Being aware of the combination of the most effective factors for competitiveness
in certain economic conditions and the mechanism of their influence, one can make
rational management decisions. An indispensable condition for the knowledge of the
socio-economic reality and the most important factor for the effectiveness of the decisions
in the field of competitiveness of high-tech enterprises is the assessment. The purpose of
the study is the definition of the vector to ensure the competitive development of high-
tech industrial enterprises. To evaluate the level of competitiveness of high-tech
industrial enterprises the author used the method based on Harrington desirability
function. The degree of importance of the functional areas of competitiveness of high-tech
enterprises was determined through the ranking method. The ranks were marked by
contractors and managers of different levels of high-tech industrial enterprises of Central
Federal District of Russia. The reliability of ratings of importance was confirmed through
Pearson goodness-of-fit test, the use of which allowed claiming that the consistency in the
opinion of the experts surveyed is not accidental and is 90%. The research produced the
following results: we defined levels of functional components of the competitive
superiority of high-tech enterprises, namely production and technological
competitiveness; scientific and technological competitiveness; environmental
competitiveness; human resources competitiveness; financial competitiveness; economic
competitiveness; market competitiveness; management system competitiveness; social
competitiveness; competitiveness of manufactured products, which are eventually
integrated into the final evaluation of the quantitative level of competitiveness. It was
revealed that the competitiveness primarily depends on the competitiveness of the
enterprise management system and, secondly, on the scientific and technological and the
production and technological competitiveness. The most important factor in the
competitiveness of high-tech enterprises is the level and potential of innovative activities.
Keywords: competitiveness; high-tech industrial enterprises; factors; competitive
sustainability.
534 Strategica 2016
Introduction
The only possible way of society development is an innovational course which
provides economic growth and well-being of the population. An innovative model of
economic development doesn’t only mean producing new knowledge translated into
technologies and products with new and improved consumer characteristics (Morris,
Schindehutte & Allen, 2005), but also introducing it into production effectively using
corresponding new types of machinery, which in its turn suggests that there are highly
developed industrial facilities.
There are several ways to implement the innovative model of economic development:
- Forced integration in the global economy with the implementation of the post-
industrial development model.
- The gradual build-up of innovative development potential.
Each of these scenarios suggests that there are competitive industrial enterprises,
most of which have an objective propensity for innovative activity; the commercial
orientation of innovative activity; innovative susceptibility; high sensitivity to any kind
of interactions.
The current stage of world economic development is characterized by the emphasis on
industrial development. Unfortunately, at present, the industrial sector in the economy
is not the primary generator of technological innovation. The proportion of
organizations implementing technological innovation, is 9.8% according to 2013,
compared to Germany – 55%, Norway – 31.2%, Poland – 16.1% (Ditkovsky &
Fridlyanova, 2015, p.301). It is also necessary to focus attention on the role that high-
tech industrial exports of Russian companies play in the world's industrial exports.
Now it is 0.5%, it is less than in the USA, Germany, Japan, China, France, Italy (UNIDO,
2013, 2016) etc.
The reason why Russian industrial enterprises have a small share in the markets of
high-tech products is to be found in their low competitiveness. Therefore, boosting the
competitiveness of industrial enterprises is a very important and urgent task.
Competitive development of industrial enterprises, including high-tech enterprises, as
well as factors influencing competitive advantage got scientific coverage in many
works that are associated with the names of such scholars as Batkovsky (2013),
Borisov and Pochukaeva (2011), Esser (2013), Godin (2004), Kutin (2009), Polenske
(2004), and others.
The purpose of this article is to define conditions and factors for the competitive
development of high- competitiveness tech industries. The paper also considers the
development of methodological tools to assess their competitiveness.
Research methods
The study was carried out in three stages:
- The first stage involved identification of the most important factors and conditions to
ensure competitive high-tech industries;
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 535
- The second stage involved evaluation of competitiveness of high-tech industries;
- The third stage was aimed at assessing the stability of competitiveness / un-
competitiveness of high-tech industries and its factors.
The findings of the research are based on the official statistics of the Russian
Federation for the period 2007-2014 as well as financial reports of the Russian
industrial high-tech joint-stock companies. The financial reports are publicly available
and taken from Interfax disclosure system.
Analyzing the official statistics, we used such criteria as net financial result, gross value
added, depreciation of fixed assets, and investment in the economic activities of
enterprises. To evaluate the competitiveness of high-tech industrial enterprises
Harrington’s desirability function was used. The initial data included a system of 75
indicators characterizing the performance of high-tech industrial enterprises of
Vladimir region. The observation period lasted 7 years from 2007 to 2013.
We chose functional areas of competitive advantage of high-tech enterprises and
defined their roles in developing competitiveness by means of the ranking method.
Experts and managers of high-tech industrial enterprises of the Central Federal
District of Russia ranked these areas. The number of experts was calculated according
to the formula:
3
Н мин 0,5 5
,
where μ is a probable error in the expert’s appraisal, %; μ∈[0,100].
The main criterion in the selection of experts was his/her professional competence.
Fifty-five experts working at high-tech industrial enterprises and regional authorities
were interviewed. Then we compared the consistency of expert opinions. For that, we
used the coefficient of concordance. The data validation of the ratings was performed
with Pearson fitting criterion with the significance level of 0.95, characterizing the
maximum probability of 5% incorrect results in the expert’s appraisal.
Measurement of sustainable competitiveness of high-tech industries was carried out
by calculation of the individual indices and sustainable competitive development of
high-tech industries - by means of calculation of the Spearman coefficient.
Scientific and analytical papers, research reports were another source of information
on the relevant factors and conditions ensuring competitive advantages of high-tech
industrial enterprises.
Results of the study
Critical analysis of current information sources on the competitiveness of industrial
enterprises allows us to say that at present there is no generally accepted definition of
competitiveness. High polysemy in the interpretation of competitiveness can be
explained by the complexity of this category, a great variety of competitive objects, the
different personal perception of the object and its competitiveness etc.
536 Strategica 2016
Our study of competitiveness as an economic category is based on the following
principles:
- Competitiveness can only occur in a free market, which is non-stationary and non-
deficient, non-equilibrium;
- Competitiveness can be considered concerning objects of market relations (goods
and services) and subjects of market relations (producer, intermediary, customer), as
well as conditions of the market economy;
- Competitiveness is a relative concept that requires specification in terms of its
formation segment, thus, the geographic factor becomes obvious;
- Competitiveness takes into account quality, both on the part of the producer and on
the part of the customer;
- Defining competitiveness requires taking into account the level of effective demand;
- Competitiveness of a producer is defined by economic, technological and other
parameters, as well as its share in a free market;
- Competitiveness of goods and services has a dynamic, constantly adjusting character;
therefore, it makes sense to consider it at a particular point in time, take into account
changes in market conditions;
- Only competition formed in one of the free commodity markets controls
competitiveness of goods and enterprises;
- It makes sense to consider competitiveness only among existing high-tech industrial
enterprises that already have a certain market share. For further evaluation, this
prehistory, i.e. the market share of companies in the previous period, has some
influence.
The competitiveness of high-tech industrial enterprises in modern conditions is a
complex concept. It is under the impact of a combination of factors, as shown in Figure
1. It also includes several levels of competitive advantage. All presented in Figure 1
factors have a diverse effect on the competitiveness of high-tech industrial enterprises.
The impact of production and technological factors on competitiveness is described in
detail in another article (Filimonova, Polzunova & Malkerov, 2013). This issue is also
addressed by Brandão Santana, Rebelatto, Périco, Moralles and Leal Filho (2015).
Scientific and technological factors besides production and technological ones include
scientific and production factors; their structure and impact are set out in detail in
Fedosova and Heifits (2013) article. Assessing the impact of state industrial policy on
the competitiveness of the industrial enterprises produced the works Carayannis and
Grigoroudis (2014), and Galbraith (2015). Enterprise competitiveness also depends on
the market and market factors (Sung, 2012) and human potential of the enterprise
(Sabadie, 2014).
Due to the experts’ appraisal, the following areas of competitive advantage have been
selected, industrial and technological competitiveness; scientific and technological
competitiveness; environmental competitiveness; HR competitiveness; financial
competitiveness; economic competitiveness; marketing competitiveness; competitive
management system; social competitiveness; product competitiveness.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 537
Figure 1. Factors influencing the competitiveness of high-tech industries
After processing the results, we got final functional areas of enterprise competitiveness
(Table 1) with the consistency of experts’ opinions 0.8 (Table 1). The data validation is
90%. The value of the indicator on the consistency of experts’ opinions proves that the
experts’ consistency in their opinions is nonrandom and thus their appraisal can be
trusted. The ranks are presented in descending order of importance.
Table 1. Importance evaluation of functional areas of high-tech industrial enterprise
competitiveness
Functional areas of enterprise competitiveness
competitiveness
competitiveness
Production and
technological
technological
Scientific and
Management
Marketing
Personnel
Ecological
Economic
Financial
Product
system
Social
Ranks of
3 2 10 4 8 7 6 9 5 1
importance
These estimates indicate that at the present stage of development the competitiveness
of high-tech industrial enterprise primarily depends on the competitiveness of the
management system of the enterprise and, secondly, on the scientific-technological
and production-technological competitiveness.
538 Strategica 2016
Several ways to assess the competitiveness of enterprises have been analyzed because
of solving the problem of determining the level of competitiveness of high-tech
industrial enterprises. All of them can be combined into four groups: approaches based
on the definition of the composite indicator; approaches based on the calculation of
single indicators; approaches based on the use of expert methods of assessment and
matrix approaches (Shchepakin, Krivosheye & Tretyakov, 2012). Yet there is no
univocal approach to evaluating the competitiveness of high-tech industrial
enterprises. The multiplicity of approaches in estimating the competitiveness of high-
tech industrial enterprises can be explained by the characteristics of the competitive
environment and involvement in this process of internal factors, and by the fact that,
on the one hand, there is close relationship between competitive advantages of
different levels, and on the other hand, there are significant differences.
The analysis of enterprise competitiveness level estimation methods has made it
possible to find out that the methods where group indicators are focused on the
determination of a certain integral parameter, and which are reduced to identifying the
most significant numerical indicators and their integration, are more preferable. When
using these methods, one should take into account the non-additive nature of
competitiveness, which is a consequence of the fact that it is an emergent property of
the enterprise, and determines the impossibility to apply the operation of addition of
a variety of measures. Competitiveness refers to latent variables, the measurement of
which is a complex creative task (Yakupova & Yarullina, 2009), and implies that the
measurement of high-tech industrial enterprise competitiveness level through one
indicator, is a priori impossible and suggests the use of indirect assessment method
through the measurement of aggregate indicators.
Therefore, the evaluation of high-tech industrial enterprise competitiveness level
should be based on the principles, the main of which are: the principle of consistency,
the principle of concurrence, the principle of common approaches, the principle of
assessment continuity, the principle of inductiveness, the variance principle, the
principle of individuality, the principle of adaptability. The principles can be combined
into two interrelated groups, the first of which reveals the requirements to the
assessment technology organization, and the second group defines the essential side of
assessment (Fedotova, Dresvyannikov, Loseva & Tsygalov, 2014).
1
One of the integral methods of high-tech industrial enterprise
fi е х ,
е
Where fi – is competitiveness level in i- a functional area of competitive edge.
е – is the base of the natural logarithm;
х – is the adjusted value of the experimental variable.
The following arguments support the use of this method: firstly, it allows to assess the
level of high-tech industrial enterprise competitiveness thoroughly; to use only
analytical dependence, making it possible to reduce the level of subjectivity of the
subject of evaluation greatly; to apply different-sized quantitative measures as a
criterion for competitiveness; to use qualitative measures as a criterion for
competitiveness, and translate them into quantitative estimates; to use comparative
and dynamic approach in the process of assessment of high-tech industrial enterprise
competitiveness . The absence of any basis for comparison (a standard of measure, a
perfect condition) is a significant positive argument.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 539
At the bottom of Harrington's function is the idea of transforming the natural values of
particular indicators characterizing the level of enterprise competitiveness, into a non-
dimensional scale of desirability. Therefore, an important step is the formation of a
system of analytical indicators.
The system of analytical indicators is to meet a number of requirements, among which
the most important are:
- firstly, it is supposed to provide multi-dimensional measurement and take into
account structural features of the competitive edge areas;
- secondly, to adequately reflect the situation and main trends in high-tech industrial
enterprise competitive development, that is the reliability of the indicators. At the
same time, indicator calculation methods should not cause significant difficulties;
- thirdly, one of the main requirements from the point of view of high-tech industrial
enterprise competitive development is interpretability of the indicators. It means that
each indicator is designed to a greater or lesser extent to illustrate and characterize
one of the functional areas of competitiveness;
- fourthly, to provide the accessibility of information sources, the simplicity of
performance measurability, the possibility of matching (comparison).
In addition to these requirements, there are generally accepted principles such as the
principle of scientific character of the indicators, their objectivity, criteria specificity,
etc. that are also to be taken into account.
Based on the above material and results of research undertaken by the author and
other experts, one can form a system of parameters characterizing the competitiveness
of the whole enterprise and its functional areas. Its construction and use are
complicated by several circumstances:
- by a large number of parameters and constraints that determine the operation of
high-tech industrial enterprises and formation of their competitiveness;
- by the complex nature of the relationships between variables that determine the state
and dynamics of high-tech industrial enterprise level ;
- by the merge of random factors, without taking into account a set of parameters;
- by the lack of quantitative assessment of a number of indicators.
In determining the level of high-tech industrial enterprise competitiveness and the
level of use of its potential capacity in this study we will take into consideration the
following restrictions and conditions:
- we use only indicators available in all types of reports of the enterprise;
- we reasonably limit the number of indicators used in the study. In scientific and
practical studies (Frolova & Kashintseva, 2006) it is believed that the number of
indicators should be minimal. In addition, it is appropriate with the competitiveness
being estimated for internal purposes of the organization. In addition, when it comes to
fostering the competitive development of high-tech industrial enterprises on the part
of authorities or to the formation of entities of cluster type on an arranged territory,
the number of indicators increases. Moreover, the purpose of such increase is a
comprehensive diagnosis of the static level of competitiveness, estimating reserves of
the use of competitiveness potential and identifying the sustainability of the calculated
level.
540 Strategica 2016
In spite of these characteristics, the use of the constructed system of indicators of
enterprise competitiveness is fraught with some difficulties. The most significant
include:
- the lack of regular information on production and technological competitiveness of
the enterprise. Especially because, as it has already been noted in other studies
(Arkhipova & Golichenko, 2007), nobody keeps records of the creation and use of
advanced production and information technologies by small and medium enterprises;
- a complete lack of aggregated information about the level of cooperation activity of
the enterprise and its effectiveness;
- difficulty in assessing the state of partnership relations between government and
business that affects the reflection of this side of competitiveness. In the proposed
system of indicators, this aspect is assessed in an indirect way.
The evaluation process was based on an iterative algorithm designed to estimate the
level of competitiveness of high-tech industrial enterprises, consisting of the following
stages:
- Setting goals and objectives of the evaluation.
- Making a list of indicators characterizing the level of competitiveness of the
enterprise subject to evaluation.
- Determining boundary values of the desirability function and calculating for them
adjusted values of the experimental variable (х).
- Calculating coefficients of approximating functions for each variable and making
equations. Linear functions are used as approximating functions. Approximation
coefficients, in this case, are found through the method of least squares.
- Calculating reduced parameter value for specific values of the estimated variable.
- Calculating the level of competitiveness of each functional area using desirability
function.
The final stage of the iterative algorithm is the calculation of the integral index of
competitiveness of high-tech industrial enterprises, defined by the model:
where – production and technological competitiveness; – scientific and
technological competitiveness; – ecological competitiveness; – personnel
competitiveness; – financial competitiveness; – economic competitiveness; –
marketing competitiveness; – management system competitiveness; fс– social
competitiveness; fпр – product competitiveness.
The numbers in the formula (2) – are the weight coefficients calculated based on the
importance rating of each allocated functional area of competitiveness. For
determination of relative importance of the criteria (Ki) the normalized iterated force
is used:
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 541
where Pi (q) - the iterated order q- force,
where the B-square matrix of estimates
By drawing up a matrix "the return symmetry" is realized:
.
where aij - estimates of experts;
M - total of experts;
i=j=n
Each calculated value of the competitiveness level, according to the formula of the
function of desirability, is given a specific economic meaning. Moreover, the value
function of desirability, equal to 0, corresponds to the unacceptable level parameter;
the value of desirability function, equal to 1.00, corresponds to a completely acceptable
level parameter or such a parameter value at which further improvement in the
solution of specified tasks is impractical or impossible. Intermediate values of the
desirability function, their economic characteristics regarding the competitiveness of
enterprises are given in Table 2.
Table 2. The economic interpretation of the parameters of the desirability function
Standard values of
the desirability Characteristics of the level of competitiveness of enterprises
function
1.00 Corresponds to the best use of the factor of competitiveness (Best
(optimal) level of competitiveness of the enterprise).
1.00-0.80 A high level of competitiveness of the enterprise, but there are
insignificant reserves of its improvement.
0.80 – 0.63 A sufficient level of competitiveness of the enterprise, allowing it to
function effectively.
0.63 An average level of competitiveness that does not cause it to be an
outsider but does not permit it to get the position of a leader.
0.63 – 0.37 A satisfactory level of competitiveness of the enterprise.
0.37 A minimum acceptable level of competitiveness that makes the
company to function and operates in the market as an outsider.
0.37 – 0.20 .The low level of competitiveness of the company preventing it from
the realization of its goals.
0.00 Totally unacceptable level of competitiveness usage of the enterprise.
The company is completely uncompetitive.
By using this algorithm the assessment of the competitiveness of high-tech industrial
enterprises operating on the territory of Vladimir region of the Russian Federation is
made. The assessment results for each functional area and the total level of
competitiveness of the enterprises represented in Figure 2.
The results of the assessment make it possible to conclude that there is not a large
scale in the levels of competitiveness of the considered enterprises. Thus, the
maximum level of competitiveness among enterprises is estimated as 0.588, and the
minimum level of competitiveness – 0.412 (Figure 3).
542 Strategica 2016
Figure 2. A fragment of the assessment results of level of competitiveness of high-tech
industrial enterprises of the Vladimir region
Figure 3. A fragment of assessment of competitiveness potential of high-tech industrial
regional enterprises
The contribution of each functional area of competitive superiority in the total level of
competitiveness is presented in Table 3 for the best and the worst company.
Thus, in all areas of competitive superiority aside from marketing competitiveness one
can see an exceeding level of parameters of one company over another. Therefore,
according to scientific-technical, personnel, economic, financial, and social areas, there
is the superiority of more than 2 times.
Beside this, in the course of the study the task was set and the results were received on
the calculation of the average private coefficients of elasticity showing the average
percent of change of level of competitiveness at change for 1% of the level of
competitiveness of functional area.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 543
For this, the regression analysis was used combined with the use of Excel. The
assessment of the statistical significance of the coefficients of the regression equation
showed that only three indicators remain significant - the competitiveness of the
system of management, scientific and technical and production and technical
competitiveness. For these factors, the average private elasticity is respectively 0.248;
0.113 and 0.114.
Table 3. The contribution of the functional areas of competitive edge of enterprises into the
final level of its competitiveness
Kinds of functional region competitiveness
Functional area of The company with the The company with the
competitive edge highest level of lowest level of
competitiveness competitiveness
Scientific and technical 0.297 0.133
Production and technical 0.372 0.335
Ecological 0.19 0
Professional 0.691 0.334
Economical 0.627 0.277
Financial 0.497 0.248
Social 0.656 0.19
Management system 0.864 0.528
Product 0.822 0.503
Marketing 0.588 0.627
Total level of 0.588 0.412
competitiveness
From our point of view, the assessment of the level of competitiveness of high-tech
industrial enterprises cannot be completed, if the level of its stability is not defined.
Stability of competitiveness implies dynamic stability of characteristics of the basic
economic condition of the company and may be reflected by formulating specific
targets, which are expressed by reordering some of the indicators of its economic
condition. It should be kept in mind that stability is a property of high-tech industrial
enterprises, which preserves the specific quality within the observed period, allows
withstanding external shocks.
In this study ‘competitiveness stability of the high-tech industrial enterprises’ refers to
the ability to remain competitive having the minimal fluctuations of this criterion in
comparison to this tendency.
Such interpretation of competitiveness involves the use of it as the statistical
characteristics of dynamic series.
With this approach to competitiveness, the following conditions must be satisfied:
- minimization of fluctuations of the levels of competitiveness in the dynamics;
- a certain tendency of changing functional areas of competitiveness of high-tech
industrial enterprises which is necessary for the region, society, companies.
These conditions underlie the assessment of competitiveness and are transformed for
describing of the two following problems.
First: Assessing the sustainability of competitiveness levels of the enterprises in the
dynamics. The solution to this problem is possible on the basis of calculations of
544 Strategica 2016
i
individual sustainability indexes ( у ), which correspond to the ratio of the average
level of the levels above trend (the average level of competitiveness for favorable
periods of time
Fбл ) and the average level of the levels below trend (the average level
of competitiveness during the adverse periods of time
Fнебл ), which is expressed as
the formula:
Fбл
iу
Fнебл ,
The closer the value of individual indices to unity, the less variability is and the higher
resistance there is.
Concerning the facts mentioned above, it can be stated that the optimal value of this
indicator is equal to one.
The state when the high-tech industrial enterprises have had the level of
competitiveness equal to one for a long period of time is called ‘hyperstability’.
However, it should be noted that the company, which has been hyper stable for a long
time, is incapable of developing due to the fact that all deviations from the balanced
state in such an enterprise are leveled. It turns out that for the transition to a new
qualitative state the high-tech industrial enterprises has for some time not only lose
strength but also to acquire the ability of irreversibility in the old ruined condition.
Second: Estimation of the competitiveness stability of the high-tech industrial enterprises
can be based on the calculation of the Spearman coefficient (Aghanbegyan, 2014):
n
6d2
К уст 1 1
n n , 3
where n is the number of monitoring periods;
d–the difference between ranks of levels of competitiveness by years and grades of
number periods.
Interpretation of the Spearman coefficient is as follows: if each following level of
competitiveness is higher than the previous one, the grades of these levels and the
К уст
numbers of the periods coincide, i.e., =+1.
This algorithm made it possible to estimate the sustainability of the levels of
competitiveness of enterprises operating on the territory of Vladimir region of the
Russian Federation. The results of the assessment are shown in Table 4.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 545
Table 4. A fragment of assessing the level of competitiveness of high-tech industrial
enterprises
Enterprise Individual indices of the stability of the Spearman
levels of competitiveness of coefficient
iу
enterprises ( )
1 1.02 1
2 1.09 -0.8
3 1.52 1
4 1.104 1
5 1.01 -0.8
6 1.02 0.6
Conclusions
We conducted a study in which we identified factors ensuring the competitiveness of
high-tech industrial enterprises to evaluate their contribution to the final level of
competitiveness of the enterprise. As a result, we have highlighted two factors that
have the greatest impact: the state of the enterprise management system, scientific and
technological factor.
Analysis and evaluation of factors made it possible to calculate the level of
competitiveness of the enterprise. For this purpose, we used Harrington desirability
function.
The method of estimating the level of competitiveness of high-tech enterprises to
determine the static level of competitive advantage presented in the article tracks its
changes over time, compares it with the level of competitiveness of other enterprises.
The proposed method is assessing the level of competitiveness to evaluate the degree
of sustainability.
The results are aimed at finding the most powerful factors of competitiveness,
improvement of the level of a technology assessment of the competitiveness of high-
tech enterprises, with the result that will allow adjusting the high-tech enterprise's
competitive strategy of its development.
The results of this study are derived from the study of Russian high-tech industry.
Further research of the authors will be associated with the assessment procedure
provided for greater competitiveness combination of domestic and foreign high-tech
industrial enterprises in order to identify patterns and trends of the competitive
development.
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548 Strategica 2016
IDENTIFICATION OF PERSPECTIVE RESEARCH AREAS IN THE FIELD
OF REGIONAL ECONOMY: RUSSIAN AND FOREIGN EXPERIENCE
Natalia FILIMONOVA
Vladimir State University
79 Gorkogo St., Vladimir, Russia
natal_f@mail.ru
Raisa FEDOSOVA
Financial University
49 Leningradsky Prospekt, Moscow, Russia
fed3670@yandex.ru
Boris KHEIFITS
Antique Arms LLC
49 Leningradsky Prospekt, Moscow, Russia
frn-professor@yandex.ru
Abstract. Identifying promising areas of research in different fields of knowledge is a
very important factor that contributes to increasing the level of scientific development in
modern conditions among a large information flow. Special attention will be paid to
studies of regional economy because it created conditions for the development factors of
the infrastructure of knowledge-based economy that include human capital, public
institutions, which provide a high quality of life, education, fundamental science etc.
Researches in the field of regional development have a long tradition and since the 2008s
this field has grown significantly. The purpose of this article is the identification of
advanced research in the field of the regional development on the basis of Russian and
foreign experience. In this paper, we performed a comparative study in the field of
regional development made by Russian scientists and the world scientific community in
order to define perspective research fronts. Web of Science and Russian Science Citation
Index were used as an information base. We used specific methods for comparative
analysis of research fronts that include: (a) Cite Space for the definition and visualization
of research fronts, (b) Google maps for visualization the connections of collaboration
between scientists and (c) semantic analysis techniques for identifying areas of research
in the field of regional economy made by Russian scientists. Our results showed that there
are differences between research areas in Russia and other countries that are caused by
the fundamentally different level of development. Most Russian studies confine oneself to
vague generalities and problems of regional development; regional development factors
are studied in them. But since 2008 publications on the development of information
society began to emerge. The results of our study can be the basis of forecasting
perspective directions of research. However, the methods of this paper require in-depth
study and can be used to further improve government support of scientific research in
Russia.
Keywords: research front; regional economy; bibliometric analysis; science.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 549
Introduction
The regional economy is a complex subsystem of the country’s national economy
causing the growth of research in the field of its development. It is due to the fact that
scientific community supports the opinion on the importance of ideas about the
regional economy functioning, binding of the regional economic mechanism key
elements, power, and orientation of internal and external links of the region, carrying
out the integration of regions into a common economic space.
In many respects, the current state and level of regions development are determined
by the history of the country, existing tendencies and factors of national economies
development. The development factors can be formed both within the country and
outside it. At the same time, a considerable part of the factors influencing the regional
economy is outside the region. In these conditions, it isn't enough to consider certain
regions without a broad analysis of their interaction with the economy in general.
Thus, the complex analysis should research not only the region but also its place in the
system of economic relations.
Nowadays, the increase of information flow in all fields of knowledge shows the need
for identification of methods and approaches to its structuring, determination of the
key research directions that determines the purpose of this study. The purpose of this
article is the identification of advanced research in the field of the regional
development on the basis of Russian and foreign experience.
Methodology of the study
For identification of the prospective research areas in the field of regional economy
development, we have used the methodology presented in Figure 1.
Figure 1. Methodology of the study
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At the first stage, keywords identification was carried out to determine the perspective
research fronts. "Regional development" and "regional economy" were used as
keywords taking into account logical conditions and combinations. These keywords
are the most appropriate to reflect the research directions.
At the second stage of the study, the Web of Science and Russian Science Citation Index
scientometric databases were selected. It is due to the fact that these scientometric
databases are used for the assessment of overall scientists’ performance in Russia
(President of Russian Federation, 2012). An essential restriction of the Russian Science
Citation Index is a lack of possibility to download the received research results that
complicate further analysis. The use of various databases has predetermined parallel
researching on each database separately.
At the third stage, a primary pool of scientific publications with the use of keywords
was created for both chosen scientometric databases. 43,886 scientific publications
were received from the Web of Science database and 876,589 publications were
received from the Russian Science Citation Index database. As the preliminary analysis
of the received publications showed, a number of articles presented in the Web of
Science does not correspond to the profile of the research and belong to other
scientific areas, such as physics and astronomy. The selection of articles from the
Russian Science Citation Index also included the articles, which did not correspond to
the scientific profile of the research. Therefore, all articles were checked for
compliance with the research profile at the fourth stage, due to which articles were
excluded from the received selections.
The difference of databases and possibilities of their analysis predetermined the use of
various methods and tools. At the stage 5a, a free product CiteSpace III was used for
the analysis of publications received from the Web of Science, which allowed to
exclude the duplicate information (Chaomei Chen, 2015). Identification of the
perspective directions of these studies in the field of regional economy was carried out
by application of bibliographic analysis methods based on the technologies of
perspective research fronts determination; this technique is widely presented in
foreign scientific publications (Guerrero et al., 2014; Yanhua, Thuminh, Beibei, Wei &
Song, 2012; Yanhua, Song, Hongyan & Beibei, 2011). In order to determine of the
research fronts, high-rating articles were selected on the basis of the co-citing method
(Marshakova-Shaikevich, 2008). The data processing was carried out by means of the
CiteSpace software product. For visualization of the obtained information and display
of interrelations between scientists, the Google map was used.
For the bibliometric analysis of the Russian Science Citation Index, a semantic analysis
of the most significant publications presented to RISC was carried out. For every year
of the period from 2006 to 2015, 30 most cited publications were selected. The search
was carried out by names, keywords, summaries and bibliography using the
information resource, which allows carrying out the semantic analysis. For each
studied period, a semantic core was determined on the basis of the most often phrases,
which allowed identifying the main directions of researches by Russian scientists. At
the last stage, a comparative analysis of the Web of Science and Russian Science
Citation Index researches was carried out.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 551
The main restriction of the study is the impossibility of the full analysis for the
publications presented in the Russian Science Citation Index. However, these methods
allow determining the main distinctive points of research in the area of regional
economy development.
The study results
The world scientific community is paying much attention to the problems of regional
economy development now. It is possible to state it due to the annually an increasing
number of publications (Figure 2).
Figure 2. Number of selected publications on the keywords from Web of Science (WoS) and
Russian Science Citation Index (RSCI) for the period 2006 - 2015
As one can see in the figure, the number of publications presented in the Web of
Science has a positive growth trend regarding the problems of regional economic
systems development. The number of publications presented in the Russian Science
Citation Index from 2006 to 2012 significantly exceeds the number of publications in
the Web of Science. The detailed study of Russian publications in the field of regional
economic development shows that the significant excess is due to the duplication of
studies published in various journals either with fully matching titles or with partially
changed titles, which is unacceptable for the world's leading publishers. The number of
publications in the Russian Science Citation Index decreases since 2013 due to
attempts of complying with the research results publication ethics. In addition, after
the adoption of new criteria for evaluating the performance of academic institutions, it
became necessary for Russian scientists to publish their articles in international
journals; it explains the growing interest in foreign scientific literature and studies and
at the same time the reducing number of publications in the Russian one.
Considerable attention is paid to the regional economy development by scientists all
over the world (Figure 3).
552 Strategica 2016
Figure 3. Distribution of publications by country in the Web of Science
As can be seen in the figure, the highest number of publications falls on the United
States, approximately 25% of all publications dealing with the problems of regional
economic development presented in the Web of Science. The share of Russian
publications is just above 1% of all publications.
To identify the promising directions of studying, clustering of publications was carried
out for the ones presented in the Web of Science platform using the CiteSpace III
software product. For the optimal reflection of data 50 most cited publications of each
year were selected, they formed a network of co-citation in the sphere of regional
development (see Figure 4).
Figure 4. Co-citation network of publications in the field of regional development
Each node represents a scientific work (published article). The color in the node center
represents the time when the article was cited for the first time, while the outer orbits
of the central part are other times of the article citing that correspond to the timeline
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 553
color. The node size indicates the frequency of citing the article by other authors. The
larger the radius is, the more often the article is cited in other works. These key nodes
can bind not only different time periods, but also various fields of research (Fujita,
Kajikawa, Mori, & Sakata, 2014).
The analysis revealed 8 research fronts (clusters), three of which are the largest ones
(Figure 5).
Figure 5. Clusters in the research of regional development
Analysis of publications included in the largest clusters allowed revealing and
formulating of their main topics. The research fronts themes were determined by the
titles, keywords and other information from the publications (Table 1).
Table 1. Summary of the largest 8 clusters
Mean
ClusterID Size Silhouette Label (TFIDF)
(Year)
0 20 0,763 1992 (10,56) output convergence; (10,46)
convergence; (9,22) culture; (8,62) regional
innovation activities; (8,62) nonparametric
growth regression
1 17 0,662 1979 (10,17) knowledge spillover; (10,17) Guangdong
province; (9,67) division; (9,22) industry
cluster; (9,1) specialization
2 15 0,774 1994 (11,29) international inequalities; (11,29)
globalization; (10,55) gap; (10,55) new
economic geography; (10,55) adding geography
3 14 0,819 1991 (14,42) regional trade agreement; (11,91) third-
country effect; (10,55) testing; (10,55) free trade
agreement; (10,55) partial-scope regional trade
554 Strategica 2016
agreement
4 12 0,725 2000 (11,91) regional system; (9,73) regional policy;
(9,65) international business theory; (9,65) key
factor; (9,65) firm competitiveness
5 9 0,96 1990 (10,55) exchange rate; (9,65) regional house
price; (8,51) convergence; (8,49) exchange rate
uncertainty; (8,49) panel co integration test
6 7 0,733 1996 (5,59) Czech republic; (5,59) growth pro-poor;
(5,59) Balkan region; (5,26) knowledge
production; (5,26) convergence
7 7 0,835 1993 (10,55) investigation; (8,49) empirical
investigation; (8,49) advanced economies;
(7,88) new approach; (7,88) convergence issue
8 5 0,98 2002 (8,49) employment growth; (8,49) employment
effect; (7,88) new business formation; (6,93)
sector; (6,85) gazelle
The largest cluster (#0) has 20 members and a silhouette value of 0,763. It is labeled
as “economic growth” by log-likelihood ratio (LLR), “output convergence” by TFIDF
((Term frequency (the frequency of the word) and IDF - inverse document frequency
(frequency of the document)) - a statistical measure used to assess the importance of
the word in the context of the document, which is part of a collection of documents
(Jones, 2004)), and “enterprise productivity” by mutual information (MI). The most
active citer to the cluster is 0,45, Ashraf (2010).
The second largest cluster (#1) has 17 members and a silhouette value of 0,662. It is
labeled as “knowledge spillover” by both LLR and TFIDF, and as “development
zone” by MI. The most active citer to the cluster is 0,47, Fu (2010).
The third largest cluster (#2) has 15 members and a silhouette value of 0,774. It is
labeled as “international inequalities” by both LLR and TFIDF, and as “regional
consumer price difference” by MI. The most active citer to the cluster is 0,4, Zeng
(2010).
The period of research front occurrence is the one with the most intense citation
activity recorded for these scientific topics. Highly cited articles belonging to a
particular cluster could be published in an earlier period as evidenced by the data
presented in Figure 6.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 555
Figure 6. The timeline visualization of clusters and their labels
The most significant publications with high frequency of citation and the most
significant authors are the following: the top ranked item by citation counts is
Krugman (1991) in Cluster #2, with citation counts of 161; the second one is Arellano
(1991) in Cluster #7, with citation counts of 129; the third is Porter (1990) in Cluster
#1, with citation counts of 114; the 4th is Romer (1986) in Cluster #1, with citation
counts of 111; the 5th is Lucas (1988) in Cluster #1, with citation counts of 108.
Another important characteristic is the publication centrality, which quantitatively
shows the importance of the publication in the network. Centrality is a characteristic
determined by the CiteSpace, it shows the publication ability to integrate other
publications. Typically, high centrality publications integrate publications in one area
of research. The top ranked item by centrality is Jaffe and Henderson (1993) in Cluster
#1, with the centrality of 0,38. The second one is Romer (1986) in Cluster #1, with the
centrality of 0,32. The third is Barro (1991) in Cluster #0, with the centrality of 0,32.
The 4th is Wooldridge (2002) in Cluster #3, with the centrality of 0,26. The 5th is
Anderson (2003) in Cluster #3, with the centrality of 0,26. The 6th is Krugman (1991)
in Cluster #1, with the centrality of 0,25. The 7th is Lucas (1988) in Cluster #1, with
the centrality of 0,22. The 8th is Hall (1999) in Cluster #0, with the centrality of 0,20.
The 9th is Broadberry (1992) in Cluster #0, with the centrality of 0,19. The 10th is
Solow (1956) in Cluster #0, with the centrality of 0,17.
Analysis of the global publication activity in the field of the regional economy using the
data presented in the scientometric database Web of Science for the period of 2008-
2015 has shown that the greatest activity is typical for the United States, Western
Europe and Asia-Pacific (Figure 7). Only a small number of Russian publications is
presented in the international scientometric databases.
556 Strategica 2016
Figure 7. The worldwide geographic distribution of research paper and international
collaboration during 2006 – 2015
The studies show a great impact of research communication between scientists on the
publications quality (Carillo, Papagni, & Sapio, 2013; Hart, 2000). This may be caused
by the fact that interaction between scientists at the level of research networks affects
the quality of publications and acts as a peer review (Rigby & Edler, 2005).
As can be seen in the figure, most scientific publications are made in the process of
international cooperation, and only a small number of publications in the field of
regional economic development are isolated. Poor communication with the scientific
community leads to research initiatives clustering, which slows down the
advancement of research and identification of promising opportunities for the
development of regional economic systems.
A relevant issue for the Russian scientists is the problem of perspective directions
determining in the field of regional economy researching. The domestic database RISC
is only developing and therefore does not allow carrying out full bibliometric analysis.
For the bibliometric analysis, methods of semantic analysis were used. As a result, a
semantic core was identified, which reflects the main focus of research by the Russian
scientists in the field of regional economic development. The main research areas are
presented in Table 2.
Table 2. The semantic core of the most important publications in the field of regional
development
Year Semantic kernel of publications (in brackets shows the usage of words and phrases,%)
2006 Farm (1.07), rural (0.98), development (0.96), agricultural (0.66), science (0.66),
agriculture (0.64), problem (0.57), policy (0.51), manufacturing (0.47), agribusiness
(0.41), control (0.39), differentiation (0.27), complex (0.27)
2007 Intensification (1.33), manufacturing (1.17), science (0.88), efficiency (0.74),
development (0.74), control (0.53), the intensification of production (0.49), problem
(0.49), system (0.47), economy (0.41), model (0.37), process (0.37), industry (0.31)
2008 Development of (1.45), network economy (1.14), control (0.90), planning (0.82),
cluster (0.75), program (0.75), system (0.59), model (0.55), policy (0.51)
2009 Development of (0.99), system (0.72), theory (0.69), innovation (0.68), science (0.55),
control (0.47), financial (0.44), finance (0.36), policy (0.35), bank (0.34), innovation
(0.28), strategy (0.28)
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 557
2010 Development of (1.36), space (1.00), spatial economics (0.80), science (0.75), system
(0.50), knowledge (0.45), innovation (0.45)
2011 Development of (1.08), science (0.82), control (0.65), agribusiness (0.40), institute
(0.40), manufacturing (0.34), institutional (0.32), state (0.28), marketing (0.27)
2012 System (1.67), innovation (1.04), control (0.94), safety (0.69), economic security
(0.59), competitiveness (0.45), stable (0.45), innovative development (0.42)
2013 Management (0.73), social (0.63), entrepreneurship (0.59), WTO (0.40), institutional
(0.36), socio-economic (0.36), level (0.36) , macro-region (0.33)
2014 Development (3.05), region (1.69), economic (1.23), policy (0.84), control (0.84),
potential (0.71), industrial (0.71), level (0.71), condition (0.71)
2015 Development (2.29), regional (1.47), formation (1.06), economics (1.06), condition
(0.94), economic (0.90), state (0.82), control (0.82), industrial (0.78), enterprise (0.74),
support (0.65), system (0.65)
As can be seen in the table, general studies predominate in most of the Russian studies
focused on the increase of regional economic systems manageability, identification of
their development problems in the period of transition to the market model of
management, which is new for modern Russia. However, publications devoted to the
formation of the information society foundations began to appear since 2007. This is
evidenced by the appearance of such keywords as knowledge and network economy in
the field of regional economy researching.
The carried-out bibliometric analysis has shown that Russia is far away from the fronts
of scientific studies in the field of mechanisms, ways and branch aspects of regional
economy development. The absence of the formed knowledge space uniting the efforts
of scientific schools, competence centers, separate scientific centers, working groups
remains an internal problem. Full-scale databases are not formed on the results of
scientific researches in various forms and scientific publications use. The majority of
organizations engaged in scientific researches have no access to famous foreign
research and development databases or publications, which prevents estimating
perspective scientific and technical achievements all over the world and revealing the
scientific results, which Russian enterprises are also interested in.
Conclusion and discussion
Thus, the use of bibliometric methods is a very useful and convenient tool for planning
and assessment of scientific activity in the field of scientific research strategy
implementation.
As a result of studying, three main clusters were revealed in the field of regional
economy development: "economic growth", "knowledge spillover", "international
inequalities". The research fronts are interdisciplinary clusters and include
publications from several adjacent scientific areas. Clusters researching helped to
draw a map of regional economy studies, determine important and relevant topics in
this area and also make it possible to promote further studying of regions
development.
Results of publishing activity by the Russian scientists demonstrate the increase of
research activity in the field of regional economic systems in the Web of Science
database. However, the bibliometric analysis of the scientific publications flow shows
558 Strategica 2016
an essential restriction set for the exchange of scientific information. Low level of
Russian scientists’ communication with the foreign scientific environment results in
clustering of the Russian research initiatives slowing down the research advance and
determination of Russian regions development perspective.
The carried-out bibliometric analysis showed that Russia is far aside from the fronts of
scientific studies in the field of regional economy mechanisms, ways, and branch
aspects. The Russian publications are more focused on theoretical research than
practical orientation. The absence of formed knowledge space uniting the efforts of
scientific schools, competence centers, separate scientific centers, working groups
remains an internal problem. Full-scale databases are not formed on the results of
scientific researches in various forms and scientific publications use. The majority of
organizations engaged in scientific researches have no access to famous foreign
research and development databases or publications, which prevents estimating
perspective scientific and technical achievements all over the world and revealing the
scientific results, which Russian enterprises are also interested in.
Comparison of the research fronts between foreign publications and the Russian
subjects can become a basis for perspective research directions forecasting. However,
this activity needs a depth study, and its development can become a serious factor of
justification for the development of research directions support of regional economic
systems in Russia.
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560 Strategica 2016
COMPARATIVE STATISTICAL ANALYSIS OF EXISTING DIFFERENCES
IN THE REGIONAL DEVELOPMENT OF ROMANIA REGARDING THE
MAIN SOCIO-ECONOMIC INDICATORS
Cristian-Valentin HAPENCIUC
“Ștefan cel Mare” University of Suceava
13 Universitatii Street, 720229 Suceava, Romania
valentinh@seap.usv.ro
Daniela-Mihaela NEAMȚU
“Ștefan cel Mare” University of Suceava
13 Universitatii Street, 720229 Suceava, Romania
danan@seap.usv.ro
Ruxandra BEJINARU
“Ștefan cel Mare” University of Suceava
13 Universitatii Street, 720229 Suceava, Romania
ruxandrabejinaru@yahoo.com
Abstract. The main objective of our research paper is the statistical analysis of socio-
demographic and educational problems of more efficient labor resources employment in
Romania. Capitalizing valences analysis unit on a time horizon of fifteen years in the
2000-2014 period, we intend to contribute to shaping the strategic coordinates of
training in our land and more exactly the developing regions of Romania, focusing on the
role of education and training. To this end we have taken as parameters of analysis:
"Rate of unemployment", "participation in education and training", "the percentage of
employment", "gross domestic product" to highlight the differences between Romanian
regions, especially the situation of region northeast. The link between these indicators
allows their use in conjunction with a considerable effect on the dynamics of economic
and social phenomena. These statistical results are needed to make it possible to conduct
statistical research to measure the performance of socio-economic processes of the
regions to formulate alternative ways of action in a process of decision-making and to
give scientific rigor decisions in specific situations. Despite the fact that they were created
more than 10 years ago, there are still significant gaps in development between regions,
especially between the West region (second in terms of level of development), which has a
diversified infrastructure and high demographic potential and highly qualified and
Northeast region (least developed), located among the poorest areas in the EU, according
to the latest economic statistics. Considering these aspects, the present study we intend to
identify the factors that caused these disparities and to analyze the evolution, over time,
the development gap between the Northeast and other regions by comparison, in the
light indicators macroeconomic. To achieve these goals, we collected and analyzed
information in different empirical studies, databases, directories and statistical reports.
Keywords: regional disparities; economic development; development regions; socio-
economic indicators.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 561
Introduction
In Romania, the development regions represent "zones which correspond to groups of
counties, formed by voluntary association of their basic convention ... regions
constituting the design, implementation, and evaluation of regional development
policies and data collection of specific statistical in accordance with European
regulations issued by Eurostat for the second level of territorial classification, NUTS II,
existing in the European Union".
An essential attribute of a region is the common interest of the welfare and
development in order to boost socio-economic progress. In the European Union, it has
been created a system called territorial unit NUTS (Nomenclature of Territorial Units
for Statistics), organized in five steps of which the most important are the top three
levels. In the EU, the regional development policy is implemented at the level NUTS II
regions. In Romania, to be applied to regional development policy were established
eight regions throughout the country, each region including several counties. The
development regions are not administrative units and have no legal personality, they
result from an agreement between the county councils and local ones. The main areas
covered by the regional policy are business development, employment, investment,
technology transfer, SME sector, infrastructure, environment, rural development,
education, health, and culture. The eight regions have certain features in the economic
structure, which makes certain sectors play a decisive role in their future development.
In turn, Romania is the sum of the interior regions, so the overall economic growth of
Romania depends on the development of these regions. As in the EU, there are
different levels of development of the countries likewise between the Romanian
regions are also gaps.
Over the past few years, it has developed a so-called "geographical economy" based on
a spatial agglomeration of industries and long-term convergence of regional income.
Leading the way in this direction were scientists like Paul Krugman, Michael Porter,
Robert Barro and W. Brian Arthur. Thus, subjects who initially showed interest only to
economists and geographers are now investigated also by sociologists, political
scientists and researchers from other subfields of social sciences. Jeffrey Sachs (2005)
explains the regional differences as influenced by geographic differences that are
present worldwide. Paul Krugman argued emphasized the idea that the geographic
location is an important component for building the new "geographical economy".
Perroux (1950) pointed out the geographical space as a web sustained by centripetal
forces, idea on which were based most of the polls of growth theories. According to
Perroux's (1950) vision, a growth pole is represented by the connections between
companies and industries. The companies that launch the development are large and
generating growth through inter-linkages. While Hirschman (1958) develops this
theory of links between firms of an industry, Boudeville (1966) positions the Perroux's
(1950) approach to spatial context.
We analyze an overall perspective of various influences, upon regional disparities, by
using data of statistical report of macroeconomic indices, of social aspects of NE region
in comparison with other regions of Romania.
562 Strategica 2016
Comparative statistical analysis of regional indicators
In order to achieve an accurate assessment of the economic development of regions is
necessary to analyze the relationship between variables "unemployment",
"participation in education and training", "the percentage of employment", "gross
domestic product" and the variable "regions" by testing the differences between
regions in terms of these indicators. Statistical logics requires us to accept that
statistical data is inherently variable and therefore the identification, measurement,
control and reduction of variation provides opportunities for improving the activity
concerned.
Variations of unemployment rate by regions
To perform this analysis we used data collected for the unemployment rate in the
2000-2014 period for the eight development regions and Romania. Analysis results are
presented in Figure 1. (Annex 1).
Unemployment Rate
Region
Figure 1. Representation of unemployment rate by Romania’s regions
To analyze the relationship between variable "Regions" and the variable
"Unemployment" we applied the statistical method of variance ANOVA using SPSS.
This analysis allows us to compare all developing regions and Romania variable
depending on the unemployment rate. We applied for analysis the test Post
HocDunnett T3. Statistical differences between regions regarding unemployment rate
are presented in Table 1.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 563
Table 1. Results of statistical differences between regions regarding unemployment rate
Compared regions t-test ANOVA
Region 1 Region 2
1.Romania 3.North-West Mdiff = 1,47, p = ,028
4.Centre Mdiff = -1,47, p = ,017
6.North-East Mdiff = 1,36, p = ,005
7.South-East Mdiff = -1,66, p = ,001
9.South-Muntenia Mdiff = -1,58, p = ,008
13.West Mdiff = 1,06, p = ,042
2.North-West 4.Centre Mdiff = -2,94, p = ,000
7.South-East Mdiff = -3,13, p = ,000
9.South-Muntenia Mdiff = -3,05, p = ,000
3.Centre 6.North-East Mdiff = 2,83, p = ,000
10.Bucharest-Ilfov Mdiff = 2,21, p = ,047
12.South-West Oltenia Mdiff = 1,58, p = ,012
13.West Mdiff = 2,54, p = ,000
4.North-East 7. South-East Mdiff = -3,02, p = ,000
12.South-West Oltenia Mdiff = -1,24, p = ,021
5.South-East 10.Bucharest-Ilfov Mdiff = 2,40, p = ,018
12.South-West Oltenia Mdiff = 1,77 p = ,001
13.West Mdiff = 2,72 p = ,000
6.South-Muntenia 10.Bucharest-Ilfov Mdiff = 2,32, p = ,031
12.South-West Oltenia Mdiff = 1,69, p = ,005
13.West Mdiff = 2,64, p = ,000
Note: in the table are reported only the significant statistical result for a level of significance of
0,05 and are presented just once
The results indicate that there are significant differences between regions in the
unemployment rate as follows:
- Analysis indicated that there are many differences between the levels of variable
statistical analysis (see Table 1). However, based on the results it can be seen that
there are two categories of regions that are grouped according to whether or not there
exist statistical differences. Therefore, there is a category of regions that have high
numerical values and between which there are no statistically significant differences.
They are Central region, Southeast and South region (see Figure 1, category denoted by
1).
- There is a category of regions that have the lowest numerical values, among which
there are statistically significant differences. They are Romania, Northeast, North-
West, Bucharest-Ilfov region, region South-West Oltenia and West region (see Figure 1,
category denoted by 2).
Medium variations of participation to training and education programs
To perform this analysis we used data collected for the rate of participation in
education and training during the period 2000-2014 for Romania and surrounding
regions development. The results of the analysis are shown in Figure 2.
564 Strategica 2016
Rate in training ad education
Region
Figure 2. Representation of participation rate in training and education
programs by region
To analyze the relationship between variable "Regions" and the variable "rate of
participation in education and training" we applied ANOVA in SPSS. For further
investigation of the differences, we applied the test Post Hoc Dunnett T3 and used the
bootstrapping method for a number of 1,000 samples to a range of 95% by selecting
the option Bias-corrected accelerated (BCA).
Table 2. Results of statistical differences between regions regarding the rate of
participation in education and training
Compared regions t-test ANOVA
Region 1 Region 2
1.Romania Bucharest-Ilfov Mdiff = -.473, CI[-.667, -.277]
South -West Oltenia Mdiff = .386, CI[.210, .575]
2.North- Bucharest -Ilfov Mdiff = -.513, CI[-.746, -.275]
West South -West Oltenia Mdiff = .346, CI[.137, .547]
3.Centre Bucharest -Ilfov Mdiff = -.646, CI[-.861, -.417]
South -West Oltenia Mdiff = .213, CI[.015, .431]
4.North-East South -West Oltenia Mdiff = .640, CI[.268, 1.101]
5.South-East Bucharest -Ilfov Mdiff = -.540, CI[-.778, -.315]
South -West Oltenia Mdiff = .320, CI[.105, .515]
6.South- Bucharest -Ilfov Mdiff = -.593, CI[-.846, -.308]
Muntenia South -West Oltenia Mdiff = .266, CI[.030, .528]
South -West Oltenia Mdiff = .860, CI[.678, 1.035]
West Mdiff = .540, CI[.339, .754]
7.South- West Mdiff = -.320, CI[-.508, -.102]
West Oltenia
Note: in the table are reported only the significant statistical result for a level of
significance of 0,05 and are presented just once
The results indicate that there are significant differences in participation rates in
education and training, as follows:
- Between 2000-2014 the average rate of participation in education and training in
Bucharest-Ilfov region was significantly higher than in other 5 regions, such as North-
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 565
West region, Central region, South-East, South -Muntenia and Romania. These results
place the Bucharest-Ilfov region the first in the country regions.
- During the same period, the Northeast region recorded a participation rate in
education and training significantly higher than the South-West Oltenia.
- Also, South-West Oltenia registered a participation rate in education and training
significantly lower than other 7 regions and Romania, which shows that this region
scores least compared to the other.
Variations of employment rate by regions
To perform this analysis we used data collected for the period 2000-2014 regarding
the percentage of employment in the 25-64 age-segment in Romania and regional.
Analysis results are shown in Figure 3.
Employment rate
Region
Figure 3. Representation of employment rate by region
To analyze the relationship between the variable "Regions" and the variable
"percentage of employment", in statistical terms we have applied ANOVA in SPSS. We
applied for further investigation Games-Howell post hoc test for a confidence interval
of 95%.
Table 3. Statistical results regarding the differences between regions of employment rate
566 Strategica 2016
4. North -East South -East Mdiff = 8,78, Sig. = 0,000
South - Muntenia Mdiff = 4,53, Sig. = 0,007
West Mdiff = 5,76, Sig. = 0,000
5. South -East South - Muntenia Mdiff = -4,25, Sig. =0,020
Bucharest - Ilfov Mdiff = -5,66, Sig. = 0,000
South -West Oltenia Mdiff = -7,14, Sig. = 0,000
West Mdiff = -3,02, Sig. = 0,033
6. South -West West Mdiff = 4,12, Sig. = 0,041
Oltenia
Note: in the table are reported only the significant statistical result for a level of significance
of 0,05 and are presented just once
In the 2000-2014 period the average share of employment in the North East region
was significantly higher than the other six regions, such as Southeast, South region,
West, North-Western, Central region, and Romania. These results place the North East
region ranked first in the country among regions, the average proportion of
employment. In addition, the South East region recorded compared to other regions
averaged 6 percentages statistically significantly lower employment, a result that
ranks last in the region with the lowest average percentage of employment. Central
Region recorded an average share of employment that is significantly lower than the
other four regions, namely Northeast, Bucharest-Ilfov, South-West Oltenia, and
Romania, which places it second to last in the list of regions.
Variations of GDP rate by regions
For this analysis, we used data collected for GDP in the 2000-2014 period, by region
and Romania. Results of the analysis are shown in Figure 4.
GDP
Region
Figure 4. Representation of GDP by region
To analyze the relationship between variable "Regions" and the variable "gross
domestic product" we applied ANOVA in SPSS. We applied for analysis Games-Howell
post hoc test for a confidence interval of 95%.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 567
Table 4. Statistical results regarding the differences between regions of GDP
Compared regions t-test ANOVA
Region 1 Region 2
1.Romania Bucharest - Ilfov Mdiff = -6371, Sig. = 0,029
2.North-West Bucharest - Ilfov Mdiff = -6821, Sig. = 0,016
3.Centre Bucharest - Ilfov Mdiff = -6528, Sig. = 0,023
4.North-East Bucharest - Ilfov Mdiff = -8100, Sig. = 0,003
5.South-East Bucharest - Ilfov Mdiff = -7164, Sig. = 0,010
6.South – Muntenia Bucharest - Ilfov Mdiff = -7271, Sig. = 0,009
7.Bucharest – Ilfov Southwest Oltenia Mdiff = 7457, Sig. = 0,007
Note: in the table are reported only the significant statistical result for a level of
significance of 0,05 and are presented just once
The results show that GDP is significantly higher in Bucharest-Ilfov than other seven
regions, which is the biggest difference of GDP compared to other regions. Otherwise,
there were no significant differences between groups. In other words, the differences
are only between Bucharest-Ilfov region and the other regions.
Correlative analysis of research variables
To analyze the relationships between the main variables of the research we applied the
Pearson correlation analysis in Table 5.
Table 5. Results of Pearson correlation analysis, for the main research variables
Correlations
Rate
GDP Unemployment Education
employment
Pearson
1 -,060 -,262** ,389**
Correlation
GDP
Sig. (2-tailed) ,422 ,000 ,000
N 122 122 122 122
Pearson
1 -,513 ** -,075
Rate Correlation
employment Sig. (2-tailed) ,000 ,294
N 135 135 135
Pearson
1 -,135
Correlation
Unemployment
Sig. (2-tailed) ,060
N 135 135
Pearson
1
Education and Correlation
Training Sig. (2-tailed)
N 135
**. Correlations are significant for a level of significance of 0,01 (bidirectional)
568 Strategica 2016
GDP
Unemployment
Figure 5. Scatterplot for Unemployment and GDP variables
Correlation between the regions and Romania, during 2000-2014, of the
Unemployment rate and GDP is represented by the Scatterplot in Figure 5.
Representation within the same system of axes of pairs of numbers corresponding to
unemployment and GDP in the eight regions and Romania shows a correlation of
corresponding values. Among the analyzed variables, there is a direct correlation. The
intensity of the relationship between the unemployment rate and GDP per capita was
studied using Pearson correlation coefficient, according to Table 5.
After applying the Pearson correlation coefficient, the results indicated that there is a
negative correlation between GDP and unemployment rate variable, which yield a
negative value of 0.262, statistically significant but of low intensity. We can say that, as
GDP grows, unemployment rate decreases. In regions where there is a higher
unemployment rate, gross domestic product has a much lower value.
Regarding the analysis of the variables GDP and the rate of participation in education
and training over the 2000-2014 period, according to the graph in Figure 6, we find
that there is a direct link between the two variables.
GDP
Education
Figure 6. Scatterplot for GDP and education variables
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 569
The intensity of the relationship between the rate of participation in education and
training and GDP per capita was studied using Pearson correlation coefficient,
according to Table. 5. The value of the Pearson correlation coefficient shows that there
is a direct and positive correlation of medium intensity, between the rate of
participation in education and training and GDP per capita in the eight regions and
Romania. In this regard, we note that as the gross domestic product recorded an
upward trend also the rate of participation in education and training is positioned on
an upward trend.
If we make an analysis of the employment rate and unemployment rate, as expected,
correlogram shows a direct link between the two variables. We find that
unemployment is associated with a declining rate of increase employability.
Rate of employment
Rate of Unemployment
Figure 7. Scatterplot for Rate of employment and Unemployment
To determine the intensity of the relationship we applied the Pearson correlation
coefficient. According to the values obtained in Table 5, coefficient shows that there is
a negative correlation of high intensity between the two variables. We can say that as
there is a decrease in the rate of employment, unemployment increases, according to
Figure 7.
Normally, between the employment rate and the unemployment rate would be an
almost perfect negative correlation (-1) because hiring reduces unemployment.
However, our results refute this hypothesis. Although the correlation result obtained is
oversized, we did not get a perfect correlation. One of the arguments supporting it
would be that there are other variables that could influence the results, such as lack of
accurate data on unemployment and properly recorded in the percentage of
employment, illegal hiring, migration and other variables.
570 Strategica 2016
Comparative results of statistical differences conversion between the averages
of advantages and disadvantages among Romania’s regions
Figure 8. Representation of significant average differences between regions regarding the
four indicators
Legend
Rate unemployment
Rate participation to education and training programs
Rate employment
GDP
Note: Each line has its ends located in two regions, which shows a comparison between
the two regions. The arrow in a region shows that the average of the region is
significantly higher than the other region. This graphic was based on the significance
tests of the regions’ averages for the four indicators.
Regions have as representation in Figure 8 the following numbers:
1. North-West
2. West
3. Centre
4. North-East
5. South-West Oltenia
6. South Muntenia
7. South-East
8. Bucharest-Ilfov
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 571
Table 6. Conversion of all significant differences between advantages and disadvantages
averages by region of the four indicators and hierarchy related to total disadvantage
(decreasing order)
Rate Rate participation Percentage GDP TOTAL
unemployment to education and Employment
formation
programs
+ - + - + - + - + -
7. South-East 0 5 1 1 0 5 0 1 1 12
3. Centre 0 5 1 1 0 3 0 0 1 9
6. South- 0 5 2 2 1 1 0 1 3 9
Muntenia
5. South-West 3 1 0 6 3 0 0 1 6 8
Oltenia
1. North-West 4 0 1 1 0 1 0 1 5 3
2. West 3 0 1 1 1 2 0 0 5 3
4. North-East 4 0 2 0 5 0 0 0 11 0
8. Bucharest- 3 0 4 0 2 0 6 0 15 0
Ilfov
Note:
(1) + represents the advantage, - represents the disadvantage.
(2) For variables „Rate participation to education and formation programs”, „Percentage of
employment”, and „GDP” the ‚+’ sign corresponds to an average significantly bigger than that of
other regions. For Rate of Unemployment, the sign ‚-‚ corresponds to an average significantly
bigger than that of other regions.
(3)The gray color cells represent big values
Results and conclusions
This analysis allows us to make some global conclusions, namely:
- In this respect, the Bucharest-Ilfov and North East regions are most advantaged in
terms of indicators, because:
a. The Bucharest-Ilfov has clear benefits for all four indicators and registers no
disadvantage compared with other regions. Has the largest GDP in the country, the
highest rate of participation in education and training, the unemployment rate is one of
the lowest in the country, and the percentage of employment is not significantly
exceeded by any region.
b. North-East ranks second as the most advantageous region in terms of indicators
analyzed. Only three indicators have advantages and no disadvantage compared to
other regions. It has one of the lowest unemployment rates in the country, has a rate of
participation in education and training good and the percentage of employment is the
largest in the country given that has the lowest numerical value of GDP but not the
least significant value of GDP compared to other regions.
- At the opposite, results indicate that there are three regions that can be classified as
the most disadvantaged regions according to those four indicators analyzed.
a. South East is the most disadvantaged of all because: has the highest rate of
unemployment in the country, the percentage of employment is numeric and in the
application test of significance lowest in the country and the rate of participation in
education and training is low.
b. the Centre and South-Muntenia obtained a total score equal to their ranks after the
Southeast, the most disadvantaged in terms of the four indicators. The employment
572 Strategica 2016
rate in Central region is one of the lowest in the country, and the unemployment rate in
the Centre and South Mountain are among the lowest in the country as well.
- The results of the three surveys show that three regions, namely West, North-West
and South-West Oltenia region recorded an average score, based on four indicators. All
three regions are located in the West. Although there are regions with average values,
in terms of total values, these three regions meet, and in small individual values - such
as in South-West Oltenia, where the participation rate for their education and training.
Also in the South-West Oltenia unemployment rate is lower than in each region, taken
separately in the category of disadvantaged regions. Also in the North-West region
Unemployment is one of the lowest in the country. Although there are the extreme
values of these three regions are in the middle between the three regions, as presented
in Figure 9.
Figure 9. Visual representation of regions’ which are advantaged, disadvantaged or
intermediary with respect to the value of the global indicator formed by the four individual
indicators
Note:
Blue color = most advantaged regions in comparison to other regions,
Red color = most disadvantaged regions in comparison to other regions,
Grey color = regions that are intermediary regarding the advantages vs disadvantages in
comparison to other regions.
In Figure 9 we represented three categories of regions: advantaged, intermediate and
disadvantaged in terms of increasing global indicator consists of the four individual
indicators analyzed. Thus, in the advantaged regions category are: Bucharest-Ilfov
region and the Northeast region; the category of intermediate regions, in terms of
advantage / disadvantage relative to other regions are: North-West, West, South-West
Oltenia; and disadvantaged regions in the latter category belong the following regions:
Central region, South-Muntenia, Southeast region.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 573
References
Boudeville, J.R. (1966). Problems of regional economic planning. Edinburgh: Edinburgh
University Press.
Hirschman, A.O. (1958). The strategy for economic development. London: Yale
University Press.
Krugman, P. (1991). Increasing Returns and Economic Geography. Journal of Political
Economy, 99(3), 483-499.
National Institute of Statistics (2016). GDP/person by regions. Statistic Breviar.
Retrieved from
www.insse.ro/.../O1_3PIB%20pe%20locuitor%20pe%20regiuni%20.xls.
National Institute of Statistics (2015). Workforce in Romania. Employment and
unemployment. Retrieved from http://ec.europa.eu/eurostat/data/database.
Peare, C.W.D., & Thomas, H. (1968). Regional economic statistics. Journal of the Royal
Statistical Society, 131(3), 330–339.
Perroux, F. (1950). Economic space: Theory and applications. Quarterly Journal of
Economics, 64(1), 89-104.
Sachs, J. (2005). The End of Poverty: Economic Possibilities for Our Time. London:
Penguin Books.
Schrieder, R., Gertrud, M., & Jurgen, J.R. (2000). Rural Regional Development in
Transition Economies: The Case of Romania. Europe-Asia Studies, 52(7), 1213-
1235.
Treiman, D.J., & Yip, K.B. (1989). Educational and occupational attainment in 21
countries. In M.L. Kohn (Ed.), Cross-National Research in Sociology (pp.373–394).
Beverly Hills: Sage Publications.
Annex 1.
GDP by regions and Romania during 2000-2013
GEO/
TIME 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Romania 1.800 2.000 2.300 2.500 2.900 3.800 4.600 6.000 6.900 5.900 6.300 6.600 6.700 7.200
North-
West 1.600 1.900 2.100 2.300 2.700 3.500 4.400 5.700 6.200 5.400 5.600 5.700 5.800 6.300
Centre 1.900 2.100 2.400 2.500 2.800 3.600 4.600 6.000 6.500 5.700 6.000 6.100 6.300 6.800
North-
East 1.300 1.400 1.600 1.700 1.900 2.400 2.900 3.800 4.200 3.700 3.800 3.900 4.200 4.500
South-East 1.600 1.800 2.000 2.100 2.600 3.200 4.000 4.900 5.500 4.700 5.100 5.300 5.600 6.000
South-
Muntenia 1.500 1.700 1.900 2.000 2.400 3.100 3.800 4.800 5.600 5.000 5.200 5.400 5.000 5.500
Bucharest-
Ilfov 4.000 4.200 4.700 5.100 6.000 8.800 10.500 14.100 17.600 14.100 15.200 17.100 15.900 17.400
South-
West
Oltenia 1.500 1.700 1.700 2.000 2.400 2.900 3.600 4.600 5.100 4.500 4.800 5.000 5.100 5.400
West 1.900 2.100 2.400 2.700 3.200 4.100 5.300 6.700 7.700 6.500 7.000 7.300 7.300 7.900
574 Strategica 2016
Employment rate by regions during 2000-2014
200 200 200
GEO/TIME 0 1 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Romania 73,3 72,4 67,3 67,7 67,5 66,9 68,4 68,1 68,1 67,3 68,2 67,2 68,1 67,8 68,8
North-West 71,8 71,1 65,5 64,3 65,3 64,9 66,6 66,1 65,4 64,0 68,2 69,1 71,7 71,6 72,2
Centre 70,1 71,5 66,9 66,3 63,2 62,7 65,1 64,1 65,1 63,5 61,7 60,4 61,1 61,6 62,0
North-East 76,6 76,7 69,6 72,3 73,6 72,2 70,8 71,8 70,6 70,1 72,8 73,4 74,9 74,7 75,7
South-East 70,9 68,3 65,0 65,7 64,4 62,9 65,2 63,2 63,5 63,6 64,0 62,3 62,8 61,5 60,7
South-
Muntenia 75,9 74,7 66,8 69,1 68,3 66,8 68,1 68,9 69,2 68,1 68,8 63,5 65,1 66,6 67,9
Bucharest-
Ilfov 69,9 65,2 65,6 64,9 67,5 68,9 72,7 71,7 72,2 72,2 72,9 72,4 71,5 69,8 71,5
South-West
Oltenia 79,9 80,7 72,8 72,0 70,7 70,1 70,7 69,5 69,7 68,9 68,4 69,7 70,3 67,8 70,0
West 69,5 69,4 65,8 65,2 65,2 65,3 67,9 68,7 68,9 68,1 67,1 66,3 66,3 67,2 68,4
Rate of participating to education and training programs by regions during 2000-2014
GEO/TIME 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Romania 0,9 1,0 1,0 1,1 1,5 1,6 1,3 1,3 1,5 1,5 1,2 1,4 1,3 1,8 1,5
North-West 0,9 1,2 0,9 1,0 1,4 1,8 1,4 1,3 1,4 1,5 1,6 1,9 1,3 0,8 0,9
Centre 0,8 0,7 0,8 1,0 1,4 1,7 1,4 1,2 1,6 1,3 1,0 1,2 1,0 1,5 0,7
North-East 0,5 0,8 1,0 1,1 1,4 1,5 1,2 1,5 1,8 1,7 1,1 1,7 1,7 4,2 2,5
South-East 0,7 0,8 1,1 1,4 1,5 1,4 1,0 1,1 1,4 1,6 1,1 1,4 1,2 1,6 1,6
South-Muntenia 0,8 0,7 0,8 0,9 1,2 1,4 1,1 1,1 1,3 1,3 0,9 1,2 1,1 1,9 2,4
Bucharest-Ilfov 1,7 2,0 1,5 1,9 2,4 2,1 2,0 1,7 1,7 1,5 1,8 2,0 1,6 1,9 1,2
South-West Oltenia 0,6 0,8 0,9 0,8 1,2 1,2 1,2 1,1 1,3 1,2 0,6 0,6 1,0 0,9 0,7
West 1,1 1,5 1,1 1,2 1,3 1,6 1,6 1,5 1,4 1,7 1,3 1,2 0,9 0,7 0,8
Rate of unemployment by regions during 2000-2014
GEO/TIME 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Romania 7,1 6,9 8,2 6,8 7,4 7,0 7,0 6,3 5,6 6,7 7,0 7,2 6,7 7,1 6,7
North-West 7,1 7,2 7,6 5,5 5,9 5,6 5,7 4,0 3,6 5,5 6,6 5,0 4,5 4,0 3,8
Centre 7,4 5,9 7,8 6,9 8,0 8,0 8,5 8,1 7,9 10,0 10,0 10,4 9,1 9,1 8,7
North-East 7,4 6,1 7,3 5,8 5,6 5,7 5,9 5,0 4,6 6,1 5,7 4,9 4,3 4,6 4,3
South-East 9,0 9,0 10,2 7,4 8,3 7,6 8,6 8,2 6,9 7,2 8,1 9,6 9,2 9,3 10,0
South-Muntenia 6,7 7,0 10,4 7,6 9,2 9,2 9,1 8,2 6,6 7,9 7,7 10,0 9,5 9,5 8,8
Bucharest-Ilfov 6,5 9,3 8,3 8,9 7,1 6,4 4,5 3,8 3,2 3,6 4,5 5,2 6,4 8,0 6,9
South-West Oltenia 5,3 5,5 6,7 6,2 7,5 7,0 7,5 7,2 6,7 7,1 7,9 7,0 6,3 7,3 6,8
West 7,4 5,0 6,2 6,6 7,8 6,5 6,2 5,2 5,4 5,7 5,9 5,5 4,8 4,9 4,6
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 575
THE CHARACTERISTICS OF INNOVATION AND THE
TECHNOLOGICAL DIFFUSION
Raul Florentin DRENȚA
Technical University of Cluj-Napoca
62A Dr. Victor Babeș St., 430083 Baia Mare, Romania
drenta.raul@gmail.com
Gabriela LOBONȚIU
Technical University of Cluj-Napoca
62A Dr. Victor Babeș St., 430083 Baia Mare, Romania
gabriela.lobontiu@cunbm.utcluj.ro
Abstract. This paper demonstrates that the importance of each of the characteristics of
innovation in the process of adoption of a new technology is different. We have done a
hierarchy of these criteria elaborated by Rogers (2003), according to their importance as
it is perceived by the Romanian adopters which have implemented projects of
technological development. The five characteristics surveyed are (Rogers, 2003): (1)
Relative advantage of the innovation; (2) Compatibility; (3) Complexity; (4) Trialability;
(5) Observability. The purpose of this paper is to demonstrate the fact that, for a certain
innovation, the general characteristics play a different role in the process of adoption or
rejection of the technology. The conducted research is a descriptive one (by the nature of
the analytical methods used), and it allows the outlining of some clear characteristics on
the common perception of the characteristics underlying technology diffusion process.
Specifically, the following objectives were targeted: (1) an AHP analysis regarding the
importance that the characteristics of a particular technology show when it comes to the
adoption process; (2) identification of potential differences on the general perception
depending on the region of residence of the companies. The main method of investigation
used to obtain the necessary data for the AHP analysis was the telephone interview. This
was based on a predefined questionnaire, and it only pursued some key aspects needed to
run the analysis. The results suggest the fact that the relative advantage is the strongest
predictor of the diffusion rate of a particular technology. Also, there are clear differences
between the observed units if we take into consideration the regions of provenance. These
differences are present in both the rate of consent and the hierarchy of the criteria
analyzed by the AHP method. The research brings a significant contribution in the area of
the diffusion of technology, by the realized ranking itself, which can be exploited by the
suppliers of new products on the market with the purpose of improving the diffusion rate.
At the same time, based on our results, people can outline industrial marketing strategies,
which come to meet the consumers’ needs, according to the importance perceived by
them.
Keywords: technology diffusion; technology adoption; characteristics of innovations;
diffusion of innovation; AHP.
576 Strategica 2016
Introduction
The process of diffusion of innovation is directly linked to four main factors: the
characteristics of the innovation, the communication channels, the social system and
the time factor. It has been established that certain new technologies follow different
diffusion patterns in different countries. This fact is clear when we compare the
developed economies with those in the process of development, the latter scoring
lower diffusion rates (World Bank, 2008).
Rogers (2003), in his work, Diffusion of Innovations, states that the innovation spreads
into society in the graphic form of an S-curved line. This is how we explain the fact that
early adopters select the new technology, being followed by the majority of the system,
until the new technology becomes common. Rogers (2003) suggests a five factor
framework in order to explain the attributes of innovation. Based on these, the
adoption speed of a specific technology can be predicted. He states that the relative
advantage of technology, compatibility, trialability and observability are positively
associated with the adoption, while the complexity is in a negative relationship with it,
but empirically connected with each other by all the five dimensions. This paper aims
to realize a ranking of these characteristics, based on the grade of importance that
these have for the adopters.
Various studies which have applied and replicated the characteristics of innovation
(Kitchen & Panopoulos, 2010; Lee, 2004; Zolkepli & Kamarulzaman, 2015), have
modified them (Agarwal & Prasad, 1997), or even extended them (Moore & Benbasat,
1991, Kearns, 1992), offer an empirical support for the present research. Nevertheless,
Peres, Muller and Mahajan (2010) underlines the fact that only few researchers have
approached the subject of the diffusion of technology at a group level or at a state level
and the way in which it differs when we speak of the adoption of a new technology. In
order to meet these deficiencies, we structured our sample in such a manner that it can
generate valid conclusions at the level of Romania, but also at the level of development
regions.
The importance of knowing the reasons which make people adopt new technologies is
also supported by other researchers, like Big and Lobonțiu (2008), Koc (2007),
Petrovan, Ungureanu, Lobonțiu and Ravai-Nagy (2014) or Sun (2016). Furthermore,
we need to know the process of adoption at a group level and its particular
characteristics (Desmarchelier & Fang, 2016). The understanding of the reasons
situated at the basis of the adoption of a new technology supplies clues about the way
in which a new innovation must be introduced into the market.
When we study the diffusion of the technology, a recurrent question emerges. What
makes people adopt a certain technology, rather than another one? If it is not only
about the personal characteristics of the adopter, which are the other factors and what
is their role? Research questions are essential because they offer a wide vision which
can be explored by various methods.
We must know all these aspects due to the fact that, as Fisher and Wesolkowski (1999)
observe, if the experience of the user with another innovation leads to a big
discrepancy to their usual routine or their expectations, he will no longer be open to
embracing the change. This resistance to new technologies leads to high opportunity
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 577
costs. They emerge due to the decrease in the efficiency, the increase in the number of
errors and the waste of organizational resources.
The diffusion of technology
The diffusion of innovation is a theory which tries to find the answers to the questions
“How?”, “Why?” and “At what pace?” are the innovative ideas and new technologies
disseminated. Bibliographical research have shown that the person who has
popularized the most the theory of the diffusion of innovation was Everett Rogers, a
Science of Communication teacher at the University of Ohio, by his book The Diffusion
of Innovation, published in its first edition in 1962.
Everett Rogers (2003) considers that the diffusion is the process by which an
innovation is communicated in time, by means of specific channels, among the
members of a social system. In the opinion of the foregoing author, the diffusion is a
special communication model in which the messages are centered on new ideas. He
also defines communication as a process in which the participants create and share
information with the purpose of acquiring mutual agreement.
The process of adoption can be summed up as being “the process through which an
individual (or other decision-making unit) passes from first knowledge of an innovation,
to the formation of an attitude toward the innovation, to a decision to adopt or reject, to
implementation and use of the new idea, and to confirmation of this decision” (Rogers,
2003). Our research is focused only on the third stage. We are trying to identify the
weight of each of the characteristics of innovation in the process of making the
decision of adopting a new technology.
The first main element of the diffusion, dealt with in this paper, innovation- represents
an idea, an object or a practice model which is perceived as a novelty by an individual
or an entity (Rogers, 2003). Generally speaking, innovation represents a novelty, a
change, and in the context of this paper represents a novelty for an individual or a
company and it is directly dependent on the perception that set individual or set
company has towards novelty. Thus, there is the possibility that an innovation to
existing on the market for a long time without an individual having any connection to it
or without him adopting it, case in which the novelty represents an innovation to set
individual at the moment of adoption. Therefore, the novelty component of an
innovation is not enough to define it, but, in Rogers’s opinion, the defining elements of
innovation are a novelty, persuasion and the decision of adoption.
The characteristics of innovation
This research analyses the characteristics of innovation from the perspective of the
role that they play in the adoption of a new technology by the companies. The
characteristics of innovation are the elements which have a significant impact on the
decision-maker and determine the adoption of a new technology. The power of
prediction of this variable is strong (Labby & Kinnear, 1985). The innovations which
are more likely to be adopted by the users are the ones that are perceived as having a
bigger relative advantage, a better compatibility and observability, with a higher rate
578 Strategica 2016
of trialability, but at the same time present a low complexity. In the context of this
research, the characteristics of innovation make reference to the attributes of the
technologies adopted by the companies from the analyzed sample.
The relative advantage
The relative advantage represents the grade up to which an idea is considered to be
better than the precedent one. The rate of the relative advantage can be quantified by
means of economic indicators, without them being, nevertheless, the only defining
factors of the present attribute. The other factors are the social prestige, convention
and the satisfaction it generates (Rogers, 2003). The relative advantage is given by the
nature of the innovation itself. Previous studies (Kitchen & Panopoulos, 2003; Ho &
Wu, 2011) have discovered that the relative advantage is one of the strongest
predictors of the decision of adoption.
Compatibility
The compatibility represents the rate at which an innovation is perceived as being
consistent with the values, experiences and needs of the potential adoptive entity of
the innovation. There is a link of direct proportionality between the adoption of a new
technology and the values of the social system in which it will be adopted. The social
culture is an element of major importance in the adoption of an innovation; there are
many cases in which it is necessary that the values of the members of the system and
of the system itself be changed first in order to be able to successfully implement an
innovation. Compatibility helps give meaning to a new idea so that it can be considered
to be more familiar (Rogers, 2003). The compatibility perceived, together with the
previous experience of the adopters, determines them to use the innovation correctly
(Garcia & Calantone, 2002; Kitchen & Panopoulos, 2010; Rogers, 2003).
Trialability
Trialability represents the extent up to which an innovation can be tested, on a limited
basis. Generally speaking, the innovations which can be applied at a small scale before
being applied at a large scale are adopted faster than those which do not offer this
possibility (Rogers, 2003). To personally test an innovation is an instrument by which
an individual can give it purpose and find out how it works. In the case of an
innovation, which can be designed in such a way as to be easily tested, it will have a
high rate of adoption (Venkatesh, Morris, Davis & Davis, 2003).
Observability
The observability refers to the extent up to which the results of an innovation are
visible for other individuals or other entities. The more visible the results of an
innovation are, the higher the probability of it being adopted by more members of a
social system. The visibility of the results makes a good discussion subject between the
members of the social system and the trust that the opinion of a friend, neighbor or an
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 579
existing user of the innovation offers represents a determinant factor in the adoption
of an innovation by another person (Rogers, 2003).
Complexity
Complexity represents the extent up to which an innovation is perceived as being
difficult or hard to understand in order to be used. Any new idea can be classified by
complexity - simplicity. Some innovations are clear to their potential adopters, others
are not (Rogers, 2003). Complexity cannot be as important as the relative advantage or
the compatibility for many innovations, but for some new ideas, complexity is a very
important barrier against their adoption (Davis, 1989; Rogers, 2003).
Methodology of research
Having information regarding the degree of importance of the characteristics of
innovation that the adopters allocate leads to a decrease in the degree of uncertainty.
Thus, we are allowed to predict the behaviour with a higher precision by the regularity
and fixing of the behaviour in a system.
The study realized by us has a descriptive character (by the nature of the methods of
analysis used) which help researchers observe and identify work models in the
relationship between individual variables and dependent variables. The independent
variables are given by the 5 characteristics of innovation while the dependent variable
is represented by the adoption of a new technology. Therefore, we assume that the
characteristics of innovation play the part of a mediator in the relationship between
the need of new technologies and the decision of adoption. The main purpose and the
novelty that our study brings lies in differentiating between the weights of the
characteristics of innovation in the process of making the decision of adoption. The
present study set out from the following hypothesis:
The characteristics of innovation (relative advantage, compatibility, observability,
trialability and complexity) influence in a different way the behaviour of adoption of a
new technology by the industrial consumers.
The main research method used in order to obtain the necessary data for the analysis
was the telephonic interview. This was based on a predefined questionnaire in which
only the key aspects necessary for the realization of the analysis were pursued. Thus,
the conversation time was successfully reduced to 5 minutes/ respondent. There was a
pilot test among the targeted population. We considered it necessary to do this test in
order to be able to generate a higher response rate. The potential problematic areas of
the initial questionnaire were anticipated and eliminated.
We opted for this method holding into account the specific advantages (Bălan, 2006):
(i) low cost; (ii) the imperative nature of the telephone; (iii) speed; (iv) cooperation;
(v) the final response rate; (vi) obtaining responses to sensitive questions.
The respondents were selected by restricted sampling based on the reasoning from the
document made available to the public by the Ministry of European Funds “Contracts
580 Strategica 2016
General Basic Information” which includes financing projects from POS POR in the
years 2009 – 2013 for all key actions and major intervention domains.
On the first phase we selected only DIM 4 key action 3 and, out of a total of 1,726
projects, we made an analysis which showed the fact that a number of 254 projects
targeted the acquisition of productive technologies and, therefore, correspond to the
criteria of selection of the unities of observation. Out of these, we excluded the
production systems with their headquarters in the Maramureș County, N-W
development area. This decision was taken on the basis of spatial proximity of the
company to the place where the research takes place (Baia Mare), therefore facing the
possibility of realizing semi-structured interviews with the representatives of these
companies with low traveling costs. A number of 82 companies were contacted with
the help of contact data made available by MFE. Out of these, 41 companies gave their
consent for the interview, hence the achievement of a response rate of 50%.
We must understand from the very beginning the limitations of this research. They
come from the socio-psychological paradigm on which the whole study of the
technological acceptance is based. The unit of analysis, in this paradigm, is the action
between a subject (the interviewed person) and an object (the adopted technology).
For the present study, the social and cultural side was completely ignored. We only
took into account the studied independent variables (the characteristics of innovation)
which sit at the basis of set action (the adoption of the technology). Also, only the
subjects that were known to us for having adopted new technologies were
investigated. The addition of new variables would make the examination of the way in
which people make decisions even more difficult.
Results
For the manipulation and analysis of the data we used BPMSG AHP Online System and
the AHP template (Analythical Hierarchy Process) made by Goepel (2013). This
method was elaborated by SAATY, in 1980, and it represents a technique structured
for the solving of complex decisional problems, which is based on mathematical
results.
The ranking was done for the five characteristics of innovation which influence the
adoption of a particular technology (independent variable). A number of 35 rankings
were analyzed on the occasion of the conducted research. The AHP scale used in the
analysis, with reference to the intensity of the importance, is presented in Table 1.
Table 1. AHP Used Scale
Intensity Definition Explanation
1 Equal importance The two evaluated
criteria contribute
equally to attaining the
objective
3 Moderate importance One of the criteria is
slightly privileged
compared to the other
one.
5 Strong importance One of the criteria is strongly privileged compared to the
other one
7 Very strong Very high demonstrated importance of one criteria over the
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 581
importance other one
9 Extreme Absolute importance of one element compared to the other
importance
Values 2, 4, 6 and 8 are intermediate values which can be used in order to represent
judgment shades in completing the five basic evaluations.
The results of the study are presented in Figure 1.
Figure 1. Result of the study (capture BPMSG AHP Online System)
The values of the consistency coefficient for this study is 0.5% or 0.05 lower than 0.1,
for all analyzed cases, which denotes the fact that the decisional matrix has been done
correctly.
The consolidated results are presented in Figure 2.
Figure. 2. Results of the AHP analysis done at the whole sample level
The consent rate of the group is 67.3%. This determined us to also investigate, using
the same method, the opinion of the subjects from the provenience region.
For this action, 3 samples of research were created. A sample made up of 10
respondents coming from the N-W region, the second made up from a number of 9
respondents with headquarters in the N-E region, and the last sample, with a total
population of 17 respondents, which have their headquarters in other development
areas of Romania.
582 Strategica 2016
The matrix of the comparisons between technologies for the N-W respondents is
rendered in Figure 3.
Figure 3. Matrix of the N-W comparisons
The results of the analysis present a consistency coefficient of 1.5% (0.015) which
indicated the correctitude of the construction from a methodological point of view. The
rate of consent is 56.5%.
The matrix of the comparisons between technologies for the N-E respondents is
rendered in Figure 4.
Figure 4. Matrix of the N-E comparisons
The results of the analysis present a consistency coefficient of 1.6% (0.016) which
indicates the correctitude of the construction from a methodological point of view. The
rate of consent is 83.0%.
The matrix of the comparisons between technologies for the respondents from the rest
of the regions is rendered in Figure 5.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 583
Figure 5. Matrix of comparisons for the rest of the development regions
General conclusions of the study and discussions
Based on the AHP conducted analysis and the objectives of this study, the following
conclusions can be drawn:
1. With a rate of consent of 67.3%, we can state that the main characteristics of
innovation influence in a different manner the process of adoption, when we speak
about the diffusion of a particular technology for the present sample. Therefore, we
succeeded in demonstrating the scientific hypothesis from which with set out. The
rate of importance that the characteristics have in the decision of adoption is:
- the relative advantage of the technology- 45.5%
- compatibility- 22.5%
- the complexity of the technology- 15.8%
- observability- 8.7%
- trialability- 7.6%
Thus, we are confirmed the results of other similar research in the field, like those of
Kitchen and Panopoulos (2010), or those of Ho and Wu (2011). Compliant to the
obtained results, we can state that the relative advantage is the strongest predictor of
the diffusion rate of a particular technology.
2. With a rate of consent of 56.5%, we can state that the importance that the
characteristics of innovation have, for the companies from the N-W region, when we
speak about the diffusion of a particular technology for the present sample is:
- the relative advantage of the technology – 42.3%
- compatibility – 21.2%
- observability – 15.2%
- complexity of the technology – 11.3%
- trialability - 10.0%
With a grade of consent of 83.0% we can state that the importance that the
characteristics of innovation, for the companies form the N-E region, when we speak
about the diffusion of a particular technology for the present sample is:
- the relative advantage of the technology – 49.3%
- complexity of the technology – 21.0%
584 Strategica 2016
- compatibility – 18.0%
- observability – 6.7%
- trialability – 4.9%
Analysing the results obtained for the N-E region, we can observe that the result are in
contradiction with Davis’s (1989) statements, and the complexity of the technology
seems to have a higher influence rate over the process of making the decision of
adoption.
4. There are clear differences between the observed units if we take into consideration
the regions of provenance. These differences are present in both the rate of consent
and the hierarchy of the criteria analyzed by the AHP method. These results, correlated
to the conclusions of the studies conducted by Desmarchelier and Fang (2016), entitle
us to believe that, in Romania, the process of diffusion of the technology is highly
influenced by different cultural factors which are present territorially, at a group level.
As a consequence of these differences between the results, we consider it necessary
that we increase the number of participants in the research and the conducting of
individual studies at a group level in all the development regions of Romania. Also, we
need to take into consideration Yaacob and Yusoff’s (2014) suggestions, who
recommends a revision of the characteristics of innovation.
From what we know so far, it is the first time when a hierarchy of the importance that
each of the specific characteristic of innovation has for the decision-maker is made.
Our contribution to the specialized literature dealing with this subject comes to fill the
conducted research in the domain. Thus, we can lower the grade of incertitude faced
by a company witch wishes to launch innovative products on the market, if it takes into
consideration, from the projecting step, the importance of the characteristics of
innovation for each segment of the targeted market.
Summarizing the foregoing conclusions, we can state that, for the decision-maker, the
general characteristics of innovation weight differently.
References
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voluntariness in the acceptance of information technologies. Decision Sciences,
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586 Strategica 2016
CITY BRANDING AS MARKETING INNOVATION IN LOCAL
ADMINISTRATION
Gabriela – Virginia POPESCU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
popescugabriela534@yahoo.com
Cristina LEOVARIDIS
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
cristina.leovaridis@comunicare.ro
Abstract. With the passing of time, society has become more and more demanding.
Nowadays, we are in search for permanent new experiences, self-achievement,
differentiation, just to mention only a few of our ambitions, and the place we are living in
– cities - should meet our expectation. Secondly, cities are becoming more and more
autonomous, independent and self-driven, as a consequence of the neoliberal doctrine.
They are individuals in a world permanently vibrating with change. Cities must meet
these new requirements and make all the necessary changes in their own way of being,
using what they have at hand – strategies successfully used in business environment. For
this purpose, cities must make use of innovation. And innovation is generated (consumed
and regenerated) by knowledge, which, its turn, nurtures itself with innovation.
Knowledge and innovation are an endless discussion. The purpose of our paper is to
highlight the attributes of city branding as marketing innovation in local administration
with insights in Romanian public administration. The research is focussed on the
perception, attitudes, and concerns of Romanian representatives about marketing
innovation in public administration and in drawing a general picture of Romania and its
cities in the greater innovation environment. The research reveals, on one hand, the
moderate interest in innovation at the basic level of local administration in direct
relation with the position of Romanian cities accordingly among other European cities.
On the other hand, this should be expected, since Romania itself is ranked under medium
level on innovation. The results should be understood and further discussed from the
larger perspective of new development trends, models and performance of cities all
worldwide.
Keywords: city branding; innovation; knowledge-based society; local administration;
strategy; marketing innovation.
Introduction. City: facts and figures
“This is the century of transformational cities”, announced Khanna in 2015 (p.53),
continuing one of his previous thesis that “cities rather than states are becoming the
islands of governance on which the future world order will be built” and the new world
will be “a network” of different “global villages” (Khanna, 2010). Generally, it is not our
intention to assess Khanna’s thesis, but it is up to us to study the conditions and to
prepare ourselves to properly face this trend.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 587
“According to the 2014 World Urbanization Prospects by the United Nations’
Department of Economic and Social Affairs, 54 percent of the world’s population
currently lives in urban areas. This number is projected to increase to 66 percent by
2050, adding a further 2.5 billion people to our cities” (Khanna, 2015, p.53). Five of the
top ten global cities are located in Asia (Tokyo, Hong Kong, Singapore, Sydney, and
Seoul), three in the United States (New York, Chicago, and Los Angeles) and only two in
Europe (London and Paris) (Chirico, 2014, p.453). But five of the most powerful cities
are located (each) in the United States (New York, Chicago, Los Angeles, Boston,
Washington) and Asia (Tokyo, Hong Kong, Singapore, Shanghai, Seoul, Beijing, Osaka,
Shenzhen) and six in Europe (London, Paris, Zurich, Brussels, Rhine-Ruhr) (Anttiroiko,
2014, p.28). According to FDI (2015, p.23) report Global Cities of the Future 2014-
2015, only eight cities out of Top 25 FDI Strategy cities are located in Europe, four in
the United States and the other are located mostly in countries with emerging
economies. The idea is that the large cities of Asia and South America are recovering
and becoming a threat to the European cities. The London School of Economics, in
Urban Age Project, predicts that 75% of the global population will be concentrated in a
few urban centres by 2050, and even today, 80% of the population of Latin America
live in cities; London is responsible “for 20-25% of Great Britain GDP”, and Moscow
and St. Petersburg megacities represent 30% of Russia GDP (Nordstrom &
Schlingmann, 2015).
Literature review
Cities development trends and models
The global city of today is characterized by urbanization, urban growth, and urbanism.
Pacione (2001, p.68) defines urbanization as an “increase in the proportion of the total
population that lives in an urban area; urban growth is an increase in the population of
towns and cities; urbanism is the extension of the social and behavioral characteristics
of urban living across society as a whole”.
Florida explains the emergence of new classes – the creative class – defined as “a fast-
growing, highly educated, and well-paid segment of the workforce on whose efforts
corporate profits and economic growth increasingly depend on”, which is able to
“power the innovation and growth”. These people are seeking for “more tolerant,
diverse, and open to creativity” cities, targeting places / cities, where they “can find
opportunities, build support structures, be themselves, and not get stuck in any one
identity” (Florida, 2002, p.15).
În 2006, Carrillo (Anttiroiko, 2014, p.115) defined “knowledge cities as urban
communities that possess an economy driven by high value-added exports created
through research, technology, and brainpower”. Two of its key assets are human
capital and innovation capabilities. The recent economic crisis launched new
challenges to Europe, one of them being the “shift of the focus from technology to
knowledge” (Cappellin, 2009, p.2).
World Bank (2011) defined knowledge economy as “one where organizations and
people acquire, create, disseminate, and use knowledge more effectively for greater
economic and social development: there are closer links between science and
588 Strategica 2016
technology; innovation is more important for economic growth and competitiveness;
there is increased importance of education and life-long learning; and more
investment is undertaken in intangibles (R&D, software, and education) which are
even greater than investments in fixed capital”.
“Innovation requires an adequate organization of the various actors involved in this
process. Urban planning leads to the creation of policy networks in urban areas. An
effective governance requires the existence and integration of various actors, with
different complementary capabilities, as also the cultural receptivity of this latter, the
flexible organization of negotiation procedures between various different interests”
(Cappellin, 2009, p.30).
“After the massive de-industrialization of the urban economies during the 1970ies and
1980ies, the economic engine of cities has changed [and cities become] the core of the
far-reaching sectoral transformation of the national and international economy into
the model of the `knowledge economy` and the competitive advantage of cities and
regions is determined by a faster adaptation of innovation” (Cappellin, 2009, p.23);
these new trends “imply the search for new forms of urban governance [aiming] at
greater public participation” (Cappellin, 2009, p.35). Since governance is defined as
“the sum of the ways through which individuals and institutions (public and private)
plan and manage their common affairs”, the key problems are related to “labor
qualification, territorial planning, living and consumption patterns, governance [...]”
(Cappellin, 2009, p.35). The knowledge city has “four thematic areas” – labor, territory,
consumption, government – and from out point of view, the most relevant is the
relationship between government and consumption because it connects the large
public projects and the creation of new identity or re-branding process” (Cappellin,
2009, p.37).
Cappellin and Brondoni (2011), in their paper about global cities and knowledge
management, highlight that “national economic growth and urbanization are
interdependent” and in this context, “cities are not only key nodes in the commercial
transactions of goods, but also hubs in the flows of information and in the generation
of new knowledge” and their growth, in the modern post-industrial period, is “linked
to the continuous changes in the internal demand [...] and internal supply [which] are
tightly integrated by the knowledge flows”. These global cities need other governance
models, suitable to “the global managerial economics”, in which “knowledge
production becomes the critical competitive factor” (Cappellin & Brondoni, 2011, p.2).
Rittgasszer (2013), and Yigitcanlar and Bulu (2015) refer to the concept of
“knowledge-based urban development” as “a new development paradigm” able to
answer the comprehensive questions about what type of improvements are needed to
integrate a city in the knowledge-based economy. Knight (1995, 2008), Rittgasszer
(2013), and Yigitcanlar and Lonnqvist (2013) define knowledge-based urban
development as “the transformation of knowledge resources into local development to
provide a basis for sustainable development and a social learning process in which the
knowledge capital is utilized in the development of sustainable urban region”.
Kunzmann (2008) considers it “a collaborative development framework that provides
guidelines to the public, private and academic sectors in the makeup of future
development strategies that attract and retain talent and investment, as well as to the
creation of knowledge-intensive urban and regional policies”.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 589
Cities are entities in need for resources able to ensure future growth, respectively
creative class, and for this, the cities supply must be diverse, complex, of high quality,
something like a “supermarket” (Zenker & Braun, 2010, p.3). Secondly, a sensitive
point, it is that cities, in completion for globally spreader resources (which lately have
become more refined and sophisticated than simply financing, export markets or
tourists, as “classically” mentioned so many times) should develop policies and long-
term strategies oriented to attract their strictly necessary resources (quantitatively
and qualitatively), in full concordance with the trends of the global world we are living
in, characterized by knowledge-based society, emerging economies, information,
capital and labour force flows – only these strictly oriented resources being able to
ensure their future growth. These city development strategies look like product or
corporate strategies so many times being proved as efficient in the international trade.
But, and this is why we called this point as sensitive to be accomplished, the places are
more difficult to be managed than any corporation: “a contract of employment is
mainly about duties, whereas a social contract is mainly about rights” (Anholt, 2010a,
p.6). Third, but not necessarily in this order, we should keep in mind the repetitive use
of words “creative”, “innovative”, “lifestyle” in Florida’s article (2002) that lead us to
the “liveability” concept, which is very close to “living the brand”.
Pacione (2001) defines urban livability as “a relative term whose precise meaning
depends on the place, time and purpose of assessment and on the value system of the
individual assessor” and it is the meeting point between the objectivity of urban
environment quality and its subjective understanding and perception of the urban
residents: “In short, we must consider both the city on the ground and the city in the
mind” (Pacione, 2001, p.396).
Characterizing innovation as a “creative destruction” (the replacement of what is being
outdated through the creation of something new and better), Joseph Schumpeter
defined innovation, in 1939, as “the commercial exploitation of an invention”
(Glodeanu et al., 2009, p.31). In this context, the innovative entrepreneur forces the
market to adapt to his inventions and forces his competitors to search for solutions to
the new conditions of competition. Thus, innovation can be defined as the process of
diffusion, assimilation, and use of new products, services, instruments or approaches
in different fields of society. He considered the economic development as a process of
qualitative change, driven by innovation defined as new combinations of existing
resources (Fagerberg, 2011).
OECD identifies four types of innovation: product, process, organizational and
marketing innovation. Marketing innovations involve “the implementation of new
marketing methods; these can include changes in product design and packaging, in
product promotion and placement, and in methods for pricing goods and services”
(OECD, 2005, p.17), including adapting the product / corporate branding to places.
From “traditional” branding to city branding as marketing innovation in public
administration
Cities are facing today new realities. One of them is the strong competition for all kind
of resources, generating – among and together with other facts – our knowledge-
driven day to day life. There is a millenary history proving this. But today, this
competition between places has become more sophisticated: cities are borrowing
590 Strategica 2016
forms, methods, means, tools, messages from already proved commercial strategies –
the brand. The product and company brands have evolved quantitatively and
qualitatively, transformed, adapted and become closer and closer to the human nature,
impregnating us with a brand-oriented behavior. Consciously or unconsciously, we
make our professional (at a personal level) and investment (at the company or
institutional level) decisions according to the attractiveness of these places. People,
like any other kind of flows (capital, financial, knowledge), move from one city to
another, according to (or being persuaded by) the city brand strategy. In this transfer,
capital, financial or even knowledge is in search for better use – “efficiency”. People
were, initially, in search for (better) jobs, but today they are interested in a better life,
interesting experiences, differentiation, self-knowledge, self-achievement. Cities must
respond accordingly to these requirements. It is obvious that cities have become more
autonomous, independent and self-determined, based on the neoliberal doctrine. Also,
it is obvious (or should become obvious) that cities must adopt innovative strategies in
order to fit our vibrant, ever-changing life.
Anholt (2007, p.33) highlights the importance of “aligning the innovation to a strategy
for enhancing the country’s international reputation” and suggests to focus it more “to
the needs and resources of the country” in order to “bring in additional investment,
better markets for the commercialized innovations and more international interest
and respect for the changes taking place”. And this is true for cities, too, because cities
are under-state entities, bearing some of the state responsibilities, and second, because
of cities, as any other entity, compete in the global arena for resources “an all need to
market themselves” (Anholt, 2007). The “consumers” are expecting something new,
interesting, attractive from cities, as well as they, are expecting from products and
companies: “it’s usually that the country simply isn’t doing enough new things to
capture anyone’s attention [...and] innovations and investments are made with the
identity strategy in mind” (Anholt, 2007, pp.35-36).
Halemane, Janszen and Go (2010, p.172) sustain that since we are living in a
networked world, in which its components (cities, countries, regions) increasingly
apply place branding to compete with each other, it means the “place branding practice
needs to apply innovative governance [... learning] from the networked world of
corporations”. They consider that “innovation scenarios” successfully contribute “to
stimulate entrepreneurship and creativity” (Halemane et al., 2010, p.174) with benefit
impact on place branding based on “co-creation” and “co-innovation”.
Anholt (2010a) explains that the place branding, including city branding, is actually
“political”, but unlike other policies or strategies, there are, “in essence, five new
ideas”. The first one refers to the “robust and productive coalition between
government, business, and civil society, as well as the creation of new institutions and
structures to achieve and maintain this behavior” (Anholt, 2010a, p.12). The second
refers to the fact that innovation lays in the brand image - “is not under the control of
the owner of the brand”, but rather in the control of its consumers; the “brand equity”
explained by the fact that “reputation is a hugely valuable asset” that needs a long term
management. Another innovation lays in the purpose of the brand, which unites
heterogeneous groups of people around a common strategic vision which management
is “first and foremost an internal project”. And the fifth new idea is the innovation itself
in all sectors of national (or city if we are referring to cities, here) activity, in order to
influence public opinion, media included, always in search for “new things that suggest
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 591
a clear and attractive pattern of development and ability within the country or city,
than in the rehearsal of past glories”. Anholt (2007) concludes that the city brand, as
included in the same category as a country brand, represents 80% innovation, 15%
coordination, and 5% communication.
The profound difference between the city and the corporate brand consists in its
ownership, its possession. The corporate, products or service brands belong to an
organization, they exist based on a commercial contract with obligations and rights
“managing brands in a specific way to achieve certain objectives” (Freire, 2011, p.170).
Kavaratzis (2009, p.29) goes further with this analysis, from corporate to product /
service and mentions that city brands are more complex than just products and
services due to the diversity of stakeholders, the number of organizations involved in
city day to day life and their limited control over the city.
The city brand does not have an owner legally and constitutionally defined (Kavaratzis,
2009), it consists of a number of different and independent organizations, indicating
that is not clear who exactly owns the brand (Freire, 2011) and this relationship is
based on the social contract that is “primarily about rights” (Anholt, 2003, p.213).
Kapferer (2008) emphasizes this distinction: commercial brands are created by
people; they create a reality, “transform it into image” and sell consumer product itself,
independent of the company's employees, making them easily transferable from one
company to another, from one owner to another. The city brand is an “irremovable
reality anchored in history, culture and its ecosystem”, turns as society evolves, but
brand the city must provide “a consensus among all key actors of the city” (Kapferer,
2008, p.127). City brand is managed by a “network of public – private organizations”
(Hankinson, 2010, p.308).
Commercial brands are more permissive in terms of addressability; city brand should
be objective, equidistant for all its publics. For certain segments of publics, sub-brands
may be identified or defined with specific targets and communication channels,
strategies and means. City brand is established as a permanent, historically
determined, existence. Product / corporate and its brand have a life cycle of different
durations, with ups and downs (eventually), in some cases, this kind of brands may be
transformed, changed, upgraded or simply disappear, as company interests require.
Cities are permanent (or at least they lifecycle has historical determination, with
sinuous and uneven evolution) and the brand is adjusted according to the general
progress of society.
Zenker and Braun (2010) “translate” the commercial brand “not literal but in the spirit
of the text”. First of all, due to the great variety of place customers differentiated by
their perceptions and demands about the city, each of them expecting and requiring “a
suitable environment for their purpose” (Zenker & Braun, 2010, p.2). The second
argument is that the city is not one entity, but a complex one – “a package of places”
overlapping in a certain degree, like a “supermarket” where consumers buy what they
want. Thirdly, the city communicates through architecture, personal or other people
experiences and creates “potential key associations” in our mind, determining
“dissimilarity in the way we perceive places in comparison to commercial brands”. City
branding cannot be taken apart from its administrative and political environment (and
592 Strategica 2016
mission), but new (innovative) conditions for branding practice (as we traditionally
know it) may be set up (Zenker & Braun, 2010).
Insights on local administration in Romania
Research methodology
The objective of our research is to identify the present status of Romanian cities in the
greater picture of global trends: innovation in public administration, city branding,
knowledge-based urban development, global competition.
The qualitative research methods enable us to obtain “sensitive” details about
attitudes, opinions, and experiences of the interviewed representatives of local
administration about innovation at personal, professional and national level,
innovation in public administration, about city branding in general and, in particular,
city branding as marketing innovation in public administration, the city new
development trends and models, the general concerns for innovation and city
perspectives. The interviews were conducted in February – April 2016, in three
Romanian cities with twelve representatives of local administration, based on semi-
structured interview guide. The duration of an interview was about 45 minutes. The
interviewed persons insisted on their anonymity due to the pre-election pressure, on
one hand, and, on the other hand, due to the strong anti-corruption campaign, being
afraid that their information may be misunderstood. That’s why we describe the
respondents only by their professional experience in local administration, as a number
of city mayor mandates (four-year term). Also, by associating the respondents to the
city mayor mandates, we intend to capture their perception about changes, strategies,
objectives, even work-style of the local administration. Their professional experience
varies from one mandate (respondents R5 and R6) to six mandates (respondents R1
and R7).
The interviews are focussed mainly on two issues: the local administration opinions
about the global trends and perspectives and the need for innovative measures and
directions in city management in order to fit these trends.
Also, the specific objectives of the research are the identification of the responsibility
for innovation, city branding and marketing; the identification of concrete innovation
projects; the level of knowledge about other cities experiences on innovation and cities
development trends and models; identification of the collaboration initiatives with
other entities in developing innovation projects. The research also aimed to identify
respondents' opinions on innovation in Romania and the modest ranking of Romanian
cities among other European cities, on the necessary education or professional
experience for the public administration employees in order to be involved in such
projects. The interviewed persons have a university degree, with at least five years’
experience on the job, working in public relations, financing and accounting,
investment, public utilities and human resources departments.
To better understand and explain the results of this analyze, the research is completed
with a secondary data analyze of reports, studies, and statistics. This research reveals
the innovation “behavior” in Romania, relating it to the European, and even the larger
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 593
environment, of global concerns about innovation. The reports, studies, and statistics
offer a general picture of Romania and its cities with regards to few indicators that
could define, in future, the “livability” of a place.
Research results
The results of the interviews are dominated by two uncertainties. The first one is
related to the soon to be local elections. Although the respondents do not have eligible
positions, they are afraid of any change that might occur in the organizations: “New
chiefs, new laws” (R1, 6). But this is a “legitimate, periodical concern” (R2, 5) , “every
four years we live with the same fear: organisation and reorganisation, optimisation of
organisation, effectiveness of organisation and so on, just words to prove themselves
and others how much the new management is working” (R3, 4). The other fear is
deeper, new and “without realistic solution” (R6, 1): the anti-corruption campaign. The
corruption is a “shameful disease” (R9, 4) with “unexpected dimensions” (R10, 5) and
“the cleaning process should be deep, long and final” (R4, 3).
The global city development trends and models seem to be, in the respondents`
opinion, a matter of “here and there”, or “us and them” (R6, 1; R7, 6). All the
interviewed persons agreed that there is a gap – “huge gap” (R3, 4; R9, 4; R8, 5), “big
difference” (R2, 5; R12, 3; R4, 3), “other story, other heroes” (R6, 1) – between
Romanian public administration, local authorities and “the other world” (R4, 3), “the
civilized world” (R6, 1). The younger ones (R6, 1; R5, 2) were more optimistic about
the future – “this country needs a visionary leader” although they are confused about
who should assume this responsibility: “whatever or whoever this leader were:
President, Prime Minister, entrepreneur, ONG”. All of them admitted that there are
”global cities” (R6, 1), “very crowded cities, but [this city] is far from a global city” (R5,
2), “Romania does not have enough inhabitants for a global city” (R6, 1) and ”anyhow,
they [the global cities] are far away from us, in Asia” (R3, 4) and ”it is impossible to
influence our life, here, in our little country” (R6, 1;, R5, 2; R8, 5).
The need for innovation is a necessary condition for future development, some of the
interviewed persons agreed (R6, 1; R5, 2; R4, R9, 4), but it needs funds, “and we do not
have funds” (R9, 4; R7, 6) and they quickly moved to their local level. They repetitively
referred only to very local issues like parking, sewerage, traffic and the general, “multi-
level” corruption. They did not make any comments about projects and future plans
due to the soon to come local elections (June, 2016). Some of the interviewed persons
agreed that “all the administration need qualified employees” (R10, 5), “people with
both vision and experience” (R9, 4), but “the salary is about 300 Euro/month, so, no
money, no performance” (R1, 6). The interviewed persons totally agreed that the city
administrations did not have the necessary financing to achieve all their objectives, but
“Govern is responsible” (R5, 2; R6, 1), “we would have had money, if they had not taken
so much for their own good life” (R1, 6), “the state should give us more money, not to
steal so much” (R8, 5; R9, 3).
The respondents described city marketing and city branding as “science fiction” (R1, 6;
R7, 6) or “something good for others, for larger cities, not for us” (R2, 5; R9, 4).
Theoretically, “the concept may be valuable, but we do not know too much about it”
(R8, 5; R7, 6). The practice is something else. The explanation of their attitude consists
first in the misunderstanding of the concepts, being considered as a “picture in leaflets”
594 Strategica 2016
(R8, 5). Two of the respondents seemed to “be afraid” of such a project considered as
“a new way of corruption – no, thanks, we have had enough” (R10, 5; R7, 6). The local
administrations do not have a proper marketing department in charge of marketing
projects, strategy etc., there are some “marketing girls” in charge with “something...
flowers to ladies on 8th March, Christmas presents for children” (R1, 6). The cities
organized or hosted few important events, but the administration was involved only as
the “main partner in charge of financing, that’s all, and look at the results, all of the
persons involved are prosecuted now” (R7, 6).
The future need of the city management is perceived only under this anti-corruption
campaign: “we need honest people” (R4, 3; R9, 4; R8, 5), but “in a country with poor
people where only the thieves are promoted... how do you expect someone to do
something good?” (R6, 1; R12, 3). The researchers go further, explaining that the
interview is not about persons, but about the management of the city, in general, as
perspective, but the respondents keep their position on discussing honesty, corruption
and anti-corruption and future local elections. The respondents agreed on the fact that
“the future is unstable” (R1, 6; R10, 5), “uncertain” (R12, 3), “I am looking for a new job
(better paid) as far as possible from these ... [very not an academic word]” (R12, 3)
expressing the hopeless situation, “I do not expect to be here next year”. Due to the
local elections, none of the respondents was able to mention any plan or project in the
future. Not even about Bucharest – European Capital of Culture, as it is short-listed for
the final evaluation. This project is considered: “2021?!? Are we going to live till then?”
(R1, 6; R10, 5) or “Who cares about 2021? We are living now, not in the future, and the
present is not bright at all, it is very dark” (R8, 5; R12, 3). The interviews continued in
the same register of “no perspective, no motivation” (R6, 1; R5, 2).
After having these insights of the Romanian employees in local administration, let’s
have a look at the general picture by reporting Romania and its cities to the EU and
global environment.
Firstly, we intend to establish the general innovation status. We used secondary
analyze of Innovation Union Scoreboard 2015 (European Commission, 2015). It
reveals that Romania is a “modest innovator”, in the same group with Bulgaria and
Latvia, below Hungary, Poland and the Czech Republic, which are “moderate
innovators”. More, Romania had developed an increased performance over the last
eight years (more than 15%), but in 2014 it registered a negative increase. As a general
status, Romania follows the EU average trend in new doctorate graduates, experts in
knowledge intensive services and youth with upper secondary level education which
may constitute a potential base for further development of innovation sectors.
Bulgaria, in the same group of modest innovators, has, as relative strong points, human
resources, and intellectual assets. Hungary and Poland are ranked as moderate
innovators. The relative strengths of Hungary are license and patent revenues from
abroad, exports in medium and high-tech products and international scientific co-
publications. Poland’s relative strengths are in non-R&D innovation expenditures and
in community designs.
In the global level, South Korea has taken the lead, followed by the United States and
Japan. EU is in the fourth position, before Canada, Australia, China, Brazil and Russia
(European Commission, 2015, p.32). This global picture should be completed with
information about global cities. Only three cities out of the forty largest cities are
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 595
situated in Europe - Istanbul (18), Paris (25) and London (position 36, equal to Lahore,
Pakistan, and Seoul, South Korea) – and all the others in Asia, Africa and America
(both) (European Commission, 2015, p.19).
This analysis reveals that Romania has rather modest results in innovations at the EU
level. This situation is becoming even rougher if we consider the global position of
Europe both as a unique entity, as the European Union, as well as the size of its cities.
Considering that the power is moving to Asia, Europe, Romania including, should adapt
its development accordingly.
Going deeper with our paper, we detailed the analyses with the city - local
administration results. This is the expression of the “internal” consumers of the city. As
it is traditionally known as a very important indicator related to the administration,
the responsibility of the living conditions is spread between the national and local
administration. In Romania, this spread is in the favor of national level (41% vs. 40%
at the local level) as revealed by European Citizenship (European Commission, 2012).
The EU average “spread” is 51% at the national level and 37% at the local level (2012,
p. 12). The higher score of the responsibility granted to the national authorities than
the local administration may be explained by the level of satisfaction with the living
conditions.
Bucharest “strongly” and “somewhat satisfied” 82% of the respondents, while the
administrative services discontented 62% of the respondents (European Commission,
2013, p.14). The same balance between satisfied respondents with the living
conditions vs. unsatisfied with the administrative services was registered in Barcelona
(90% vs. 49%), Budapest (84% vs. 38%), Prague (90% vs. 55%), and Sofia (88% vs.
60%). This means that Bucharest follows the same administrative model, as other
European capital cities, not offering anything else to its inhabitants. In this situation, it
is necessary to evaluate how it behaves with the “external” consumers – investments.
We consider that direct foreign investment as the most suitable indicator for the
purpose of our study because they are long-term oriented, and involve not only
financial or material resources, but also attracting of intellectual capital and new
residents.
We analyze the position of Romanian cities among the other European cities between
2012 – 2017 (fDiIntelligence, 2012, 2014, 2016), in order to have “an external point of
view” about those cities. Bucharest is mentioned six times in these reports. In 2012
Bucharest is ranked on the fifth position in Top 25 Eastern European Cities, before
Sofia (6/10) and Budapest (8/10), while Prague (20/25) and Barcelona (22/25) are
ranked in a larger score of Top 25 European Cities – overall. Bucharest is also
mentioned as the ninth city on top 10 business friendliness in 2012/2013 report. In
the following period, Bucharest advanced only on the cost effectiveness indicator, as
third out of ten major cities and it is expected to save this position in 2016/2017
report, with better results on Top 25 European Cities – overall cities and the seventh
position out of ten as business friendliness (fDiIntelligence, 2016).
Sofia (fDiIntelligence, 2012) was ranked on cost effectiveness (10/10) and economic
potential (9/10) and Barcelona attracted foreign direct investments (4/10) due to its
human resources (8/10) and infrastructures (10/10). These inputs help the city to
promote the seventh position on top 25 European Cities in 2014/2015 Report.
Budapest also promotes the first position of Top 10 Eastern European Cities, on the
596 Strategica 2016
fifth position on Top 10 Business Friendliness and eighth position on Top 10 Foreign
Direct Investment Strategy in 2014/2015 Report.
The results do not clearly reveal the significance or preoccupation or the interest of
foreign investors in the Romanian cities. Placing Bucharest and the other Central-
Eastern European cities at the same average level should be considered as a solid
motivation to use differentiation strategies in order to individualize these cities.
One of the conclusions could be that local administration opinions about global trends
and perspectives and the need of innovation are still too far objectives. For the
moment, these issues are put into shadow by the election and anti-corruption
campaign. Romania, its cities, and public administrations are somehow isolated or
separated from the vibrant crowded cities in a permanent competition. The
administrations have local interests, short-term projects, some of them with great
impact in improving the life conditions in cities (parking facilities) but they refer to
something very basic, at the bottom of civilized living conditions. Their projects are not
of long perspective, nor address a complex area. There is no cohesion between local
administration and residents’ needs. It seems that public administration is concerned
and responsible only for the traffic, parking and sewerage. Other needs – self-
achievement, identity as belonging to a “community” – are not at all in the competence
of the local administration. The city hall is part of the events more as a formal duty, or
“candidate image campaign”, not as leading the community, nor as part of the
community, and, anyhow, nor as “living the brand”. We put this behavior on the behalf
of the lack of knowledge about city branding, a concept too early compromised and
forgotten due to misunderstanding and misuse (as a country brand). Of course, there
are other explanations, too. The low level of salaries in public administration will never
motivate the employees to be creative or dedicated to innovation. On the other hand,
innovation, being it marketing innovation implies a certain degree of risk, of
uncertainty. At a certain level and having the previous example of several country /
nation branding projects that failed due to corruption or not-knowing the concept, the
theory and practice of place branding, the city branding as marketing innovation in the
public administration may be considered now only a waste of money or a classic
receipt for corruption. A re-evaluation of the situation in the next 12 – 18 months may
reveal another point of view.
Discussions
There are a few issues to be discussed. The discussions with representatives of the
local authorities are not very encouraging, but we make responsible for this only the
local election (in less than one month) and the anti-corruption campaign which “makes
a lot of noise, puts a lot of pressure, but resolves nothing” (R12, 3). The respondents do
not have a proper perspective of the real picture of the global competition and the new
role of the state. They are very local and present-oriented, with a strong belief in the
traditional paradigm of the “mighty state”.
The same conclusion of inner orientation or, at least, an orientation toward a limited
time and space, is identified at the upper, central level, as the secondary data analyze
revealed. The results presented in these reports are easily predictable: Romania
(Bucharest included) risks to lose itself the in the anonymity of average (or lower)
country as a foreign investment destination, innovation promoter or livability for its
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 597
inhabitants. In this rough global competition, Bucharest, as the capital city of Romania,
should look for instruments, means and solutions able to differentiate it from other
cities both at EU level and global level and adjust it to the requirements and
expectations of its stakeholders now and in the future. Olins (2010, pp.143-144)
mentioned that place (city included) branding is “a catalyst for change” [able to
differentiate the cities from] “a compact, not-differentiated, anonymous and boring
mass”. More importantly are the next steps to be taken. First, we should look at other
cities brand strategies and adopt some of their models. We are encouraged in this
direction by the large participation of the Romanian cities in the pre-selection for the
European Capital of Culture considering “it may be fitted into a broader strategy for
the city” (Popescu, 2015, p.184). Even if the respondents in the interviews have
something else in mind, but, according to the documentation the cities presented up to
now, there are also other bodies involved, both from private and public sector, and, as
Sibiu proved, the process is difficult at the beginning, but successful, in the end
(Iohannis, 2014).
Considering all these aspects presented in this paper, we conclude that the general
trend is toward the city as the central engine of overall development and it needs an
agile, innovative, creative strategy to answer the future demands of its stakeholders.
But there is a gap between the city administration as a whole, with a conservative,
traditional, passive attitude and the dynamic demands, expectations and requirements
of the present and future complex situation. We are talking now about “a very
plausible scenario called Non-state World” and “humanity’s rapid urbanization only
means that people are moving into cities, not that the cities are prepared for their
arrival” (Khanna, 2016, pp.279-280).
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600 Strategica 2016
VALORIZATION OF THE LEARNING ORGANIZATION’S PRINCIPLES
IN THE BUSINESS HIGHER EDUCATIONAL SYSTEM (HES)
Ruxandra BEJINARU
“Ștefan cel Mare” University of Suceava
13 Universitatii Street, 720229 Suceava, Romania
ruxandrabejinaru@yahoo.com
Cristian-Valentin HAPENCIUC
“Ștefan cel Mare” University of Suceava
13 Universitatii Street, 720229 Suceava, Romania
valentinh@seap.usv.ro
Abstract. A major factor of influence for the business education domain is the business
environment itself. As members of education institutions, we all know that there still
exists a great gap between theory, what students learn during their academic cycle, and
practice, what they are expected to do in the real business environment. At some point,
we have all confronted ourselves during our teaching activity with learning paradoxes
and several learning barriers. We shall further discuss through this paper what these
concepts refer to and we shall explain why they must be overcome. Nowadays, the quality
standards for the education system are very high and they are set by the business actors.
The preparation of a good professional in a specific business area depends not only on the
prestige of the education institution, the experience of the professor, the information
technology available in the laboratory but mainly on developing the right way of thinking
and thus the most efficient and effective way of developing new projects, of finding
innovative solutions and finally of achieving success. We believe that the academic
education, in any domain, should enable students to think and to act as specialists. The
purpose of this paper is to bring arguments that learning how to think strategically in the
business environment is critically important and it should be the core of business
academic education. In this context, we shall present the principles of a learning
organization and what benefits they generate when they are accordingly applied. As a
bottom line, we dare to say that top education is no more about the studied content but
more about the thought / provided thinking patterns. The mission of a skilled professor,
supported by the adequate environment, is to teach students the right way of thinking in
that specific domain. Thus, the business education should prepare its students to think
strategically as the business environment is more complex and dynamic than ever.
Throughout the sections of this paper, we present several insights on how a university
should apply the principles of a learning organization which we believe are very useful
for the students and practitioners in the business field. Though it is a conceptual work -
we consider it valuable for the subjects it approaches and for the ideas presented.
Keywords: learning organization; business education; knowledge strategies; knowledge
dynamics; strategic thinking.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 601
Specificities of different types of learning
Considered by many individuals as a simple and common process, learning has evolved
from the basic stages described by Abraham Maslow to complex learning models. The
stage of theoretical and descriptive writings on the concept of a learning organization
is somewhat outdated and efforts of progress are achieved through education,
research, implementation or training programs that lead to concrete results. In order
to provide the necessary background to discuss the working principles and paradoxes
within the Higher Educational System (HES), first, we need to present essential issues
of the learning process: learning levels, learning stages, learning methods, types of
learning and contexts of learning.
Within the business educational system, several featured aspects should be considered
when preparing and delivering the educational package. Due to the complexity of our
knowledge based society and the exponential changes that characterize our present
time – and probably even more so, our future – the role of HES is also changing. A
couple of decades ago, students in various types and levels of schools were preparing
for specific and well-known professions, now schools need to assist their students in
preparing for jobs that are not known at the time. Also, students must be trained and
prepared for solving problems that have not even been recognized. These issues
influence the very essence of learning, the way we view learning, as well as learning
management technologies and methods that can be applied efficiently. We must
acknowledge that these changes have a significant impact on teacher training, its
content as well as its methods and on schools where teachers work (Baráth, 2015).
The increasing rhythm of change leads to another critical issue, which has been put
into light by managers and entrepreneurs in the business and that is ”the gap between
what leaders want and what recruiters deliver”. According to Harvard Business
Review research, based on a survey of leaders from almost 700 global organizations,
there is a significant gap between the importance of key recruitment activities to
leaders and the performance of these tasks by recruiters. While managers understand
the importance of hiring star players, recruiters simply are not doing a good job of
finding them (Marks, 2016) In this case, both sides are taken. The recruitment process
needs investment by the operational teams that need the recruits, to look at deeper
abilities. To understand which skills or combinations of them are sufficiently similar to
those required, that with a little learning curve, they will fit the requirements. Most of
all, hirers should concentrate on the ability above experience, and discard the
ridiculous proposition that someone is only capable of doing precisely the same thing
they have been doing during the last three years (Marks, 2016). By analogy, we
enquire whether HES is providing the employers in the business market with
appropriately skilled and trained graduates.
In the context of an educational organization, learning methodology is closely related
to the methodology for knowledge sharing. Considering the learning process in a
strategic approach, lifelong learning refers to the increasing need of development on a
personal level, on a collective level and on intellectual capital at the organizational
level. According to Marsick and Watckins (1996), learning and knowledge sharing
within an organization occur on four levels. First, as individuals learn on their own.
Afterward, as they integrate into an organization and are involved in its development
plan individuals move to learning as a group, as a team or working in an organization.
602 Strategica 2016
We support the idea that the development of methods of learning starts from an
individual's willingness to learn and to evolve. Later they develop methods and
techniques of group learning. Each of the four levels of learning should be approached
accordingly. For the first level, the individual realizes meanings / significations up
their skills and acquire knowledge. The next level, the peer learning is achieved when
employees work together to create knowledge and develop the collaborative ability. At
the organizational level, learning is reflected in the organization's culture, policies,
operating procedures, and/or information systems. When the organizational level is
exceeded then the thinking global level is reached.
We continue by presenting learning methods referring back to the levels and structure
depending on the context / environment. Thus, for individual learning, a method that
we may suggest is training at work or at home. In addition, for group / team learning
we suggest constructive criticism (peer review) among members. Learning methods
should be chosen so that the beneficial effects to be felt within the organization, not
just by the person. Farago and Skymre (1995) suggest a model that structures learning
methods on four levels as follows: 1. Learning facts, knowledge, processes and
procedures; 2. Learning new skills / workplace skills that can be adaptable to different
situations; 3. Learning to adapt, 4. Learning to learn.
Figure 1. Evolution of the four levels of learning (Farago & Skymre, 1995)
Commenting on the profound significance of this model (Figure 1), we see an essential
and valuable aspect, that neither the organizational learning process nor the learning
organization concepts are limited to developing skills and gaining knowledge. They are
more oriented to learn how to look into and understand better some problems and
situations, so you manage to adapt your knowledge in a real context. We highlight here
the superiority of know-why and know-how on the know-what. At this point, we also
underline the superiority of the thinking models over the assimilated quantity of data,
information, and knowledge. The third level of learning and adaptation emphasis is
growing and that starts the creative processes of innovation. The top level is the most
difficult to be reached. Buckler (1998) believes that an organization can only be as
strong as the weakest employee can. This statement clearly springs from the systemic
perspective that the author promotes. Imagining the organization as an interconnected
system, we understand why a weak link is influencing and dictates the outcome.
Dynamic components and systems converge towards a point of equilibrium and the
learning organization finds balance through its branches (components).
As represented in Figure 2 the first elementary learning stage is called – unconscious
incompetence. It represents that state of the art when the individual does not
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 603
understand or know how to do something and does not necessarily recognize the
deficit. They may deny the usefulness of the skill. The individual must recognize his or
her own incompetence, and the value of the new skill, before moving on to the next
stage. The length of time an individual spends in this stage depends on the strength of
the stimulus/motivation to learn. The next stage, considered superior, is called –
conscious incompetence and represents the situation when the individual becomes
aware of a certain deficit or a skill he/she lacks. The fact is that the person does not
understand or know for sure how to do a certain thing even if he/she admits this
shortage. At this point the might be made several mistakes as the learning process
starts to develop. The following stage is named – conscious competence. From this
moment further, the individual is aware of what he knows and what he must do to
solve a problem. In addition, the conscious competence state reveals that in order to
demonstrate his/her knowledge and skills the individual must concentrate and get to
the action. This means that the whole process implies a certain effort. The –
unconscious competence describes that stage where the individual has accumulated
enough practice and experience in order to perform easily the required skills. In many
cases, skills may be executed simultaneously. At this stage, the individual can teach its
skills to others.
Figure 2. Maslow’s four stages of the learning process
The learning process has a great importance for the business education suppliers as,
for example, a university. For a long time, the mission of a university has been
considered an implicit message and it was wrong. The contemporary reality has
proved that the mission of a university has to be formulated explicitly and
disseminated to the wide public. It may be approached from a double perspective: as a
product and as a process. The product perspective allows the formulation of strategic
objectives and represents a design of the strategic plan, which shall further be of great
importance for the marketing campaigns. When approached as a process the mission
of the university is elaborated and refined through several stages of consultations with
the employees (professors and researchers), students and representatives of the
employers in the external environment. In essence, the mission of a university is to
offer / provide high standard education and research for academics and for the society
(Brătianu, 2002).
604 Strategica 2016
Skerlavaj, Stemberger, Skrinjar and Dimovski (2007) talk about organizational
learning cultures, which have the potential to change behaviors, both at the individual
and at the organizational level. This is also the case for universities. In their approach,
organizational learning culture is, by its nature, integrative, as it reunites elements
from all the four quadrants of the competing values framework. It has to be oriented
towards the interior, but also towards the exterior, it has to be flexible and democratic,
but also to include some elements of control, to give the clarity and the structure of the
learning processes. In this context, we may say that learning-supportive-cultures
function as integrators, assembling variety into a coherent pattern that shapes the
organizational behavior.
The learning organization follows these basic stages as it promotes continuous
learning. It is obvious, after reviewing the Maslow model that any need for acquiring
new knowledge and skills (competencies and capabilities) occurs after identification of
needs, of obstacles and generally called – of problems.
Figure 3. The five stages of organizational learning
For Argyris and Schon (1978) the transition from individual cognition to
organizational-level learning and change is partly possible because double-loop
learning allows rational exposure of irrational modes of individual and group behavior
(political or otherwise), while at the same time making explicit the rules, strategies,
structures and roles that are the foundations of organizational learning (Caldwell,
2011).
The OECD analysis proves the importance of learning for both the society and the
individual. Researchers considered three different occurrences of performance
increase and, calculating with a life expectancy of 80 years of those born in 2010, they
predicted that by 2090, the total economic growth in OECD countries would reach USD
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 605
115, 200 and 260 trillions. This growth is much larger than the expenses spent on
development (Baráth, 2015).
Paradoxes and barriers regarding a learning organization
The Higher Education System (HES) contains all accredited institutions of higher
education, regardless of their structure and profile. Due to their essential role in
knowledge acquisition, generation, transfer and diffusion and in cultural value
preservation, universities represent core institutions of any country (Brătianu, 2009).
For a university, the process of production and the process of management both
operate in the field of knowledge. Although problematic, the ideal learning
organization is promising more to organizations that seek to change rigid hierarchical
structures, communication systems with restrictions and authoritarian leadership.
In order to underline the practical relevance of the functionality of a learning
organization, we discuss contexts such as the university as a learning organization and
libraries as learning organizations. In doing so we will appeal to the comments from
the literature and personal judgments as to obtain a correct perception that requires
alignment. Jain and Mutula (2008) proposed the issue of libraries as learning
organizations. The justification for the choice of theme comes with growing pressure
on libraries for them to become, in terms of their practice, learning organizations so
that there should be a better knowledge management and should be cultivated a
culture of lifelong learning in order to support dealing with present and future of these
organizations. The perspective brings into focus the role of a learning organization,
namely to create, share and disseminate knowledge and to enhance the ability to
operate in a digital environment that is amplified. Taking the example of universities’
libraries, we can state that they suffer strong transformations due to the expansion of
new technologies, customer expectations, competitive pressure, development of the
knowledge-intensive organizations and the transformation of librarians’ roles. The
relevance of this approach is that university libraries have been and are considered the
"soul" of the institutions they belong. As a result, they are faced with challenges and
opportunities that the digital domain should understand, as a learning organization
and in this regard to reconsider roles / their duties.
A very strong paradox that professor Brătianu (2009) speaks about, due to his wide
experience, research, and knowledge, is called the leadership paradox. Professor
Brătianu explains that the paradox of the strategic management in the universities
consists in the fact that leadership positions are assigned to those professors who have
the best research results and academic prestige and not to those who have managerial
capabilities and experience. According to these issues within an education
organization, like a university, there is a great interest of the leadership to improve the
education services and thus the learning process.
Professor Brătianu (2009) formulates the learning organization’s paradox by analogy
with academia as such: though a university is an organization based on the learning
processes is not necessarily a learning organization. The possibility that the university
becomes a learning organization is conditional on a strong integrator to ensure the
transition from individual learning to team learning and organizational learning
afterward. However, many universities are far from the model of a learning
606 Strategica 2016
organization as they are facing functional and mentally barriers. Similarly, with the
business environment, the university production processes are identified with the
production of learning and ensuring knowledge transfer and uses the knowledge
management process. For a university to become a learning organization it is
necessary that the management process becomes more focused on the learning
process. This perspective is consistent with progress double-loop learning (described
by Senge - double-loop learning) (Brătianu, 2009).
The concept of a learning organization is an ideal one that has not yet found the perfect
implementation in practice as there are encountered several limitations and obstacles.
More cautious authors have expressed criticism of the concept. For example, Finger
and Woollis (1994) criticize learning organization literature oriented towards the
human capital that considers people as "resources" to be exploited in actions aimed at
obtaining profit for the organization. The authors say that the potential power of the
market structure and value of processed knowledge remain unexamined and learning
is distorted / twisted into a tool designed to gain competitive advantage. From another
perspective, the learning organization could be criticized for its ideal of lifelong
learning in teams and perfected to provide unfailing power to elites serving of such
ideologies - obscuring the nature of always fighting individuals to maintain their jobs
and nurturing a healthy mind in a chaotic work environment. These people come to
overlap alternative identities and find themselves in another post, in an attempt to
understand what they need to survive until the end of the day. Ultimately, the ideal of a
learning organization is worth asking the following question: whose interests serve the
concept of a learning organization, and what kind of power relations ensures?
(Fenwick, 1996).
The so popular notion of "empowerment" of employees, which is prevailing the
literature on the learning organization, is not examined objectively. In this regard West
(1994) critically argues that "empowering" employees cannot be beneficial to the
organization but only when their objectives overlap and do not conflict. Another
paradox within the literature about learning organizations is that often it is
prescriptive because actually hierarchies of power and technology that claim to be
liberalized are mastered by the organization to control and destroy the resistance of
employees during restructuring and organizational compliance on the agenda of
continuous learning.
The third paradox is linked to context, connectivity, trust and opportunity that breaks
in a climate of anxiety, darkness is not realized in the optimistic vision of a learning
organization. Employees are told to trust the agenda of the organization that focuses
on human development and are invited to witness and to give up their most intimate
beliefs and desires and continue to learn - to forget that they are in constant danger of
being dismissed in an expeditious manner (Fenwick, 1996).
Number four paradox shows up by analyzing the implementation of the principles of a
learning organization: the theory supporting lifelong learning through exploration and
production of knowledge innovation and organizational rules bumps of productivity,
accounting and measuring results using their forecasting. Through this approach,
Rowley (2000) shows that the traditional way of measuring organizational
performance through training and preparation are still prevalent and distort concepts
of systemic learning and dynamic new paradigm (Rowley, 2000).
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 607
The concept of a learning organization based on the administrative control of the
dialogue between employees paradoxically oppose the assumptions of free knowledge,
temporary relational technologies that learning organizations should produce. The
paradoxical implications of the learning organization have an impact on employees
and create a problem in terms of knowledge creation and its employees’ identity. Thus
the employees have to keep fighting to create an identity, meaning, and purpose in
their work.
Principles of the learning organization to be applied within HES
A learning organization is an organization skilled at creating, acquiring, and
transferring knowledge, and at modifying its behavior to reflect new knowledge and
insights. This definition begins with a simple truth: new ideas are essential if learning
is to take place. Sometimes they are genuine creations, through flashes of insight or
creativity; at other times they arrive from outside the organization or are
communicated by knowledgeable insiders. Whatever their source, these ideas are the
trigger for organizational improvement. However, they cannot by themselves create a
learning organization (Garvin, 1993).
When speaking of continuous adaptation to a changing world throughout the
governance of HES it should be made more beyond. In the adaptation process,
universities focus on their traditional mission of teaching, learning, and research.
Today, society asks much more from universities in terms of their contribution. Thus,
universities should switch from creating adaptation (adaptive) knowledge to produce
generative knowledge, and to become learning organizations (Brătianu, 2011, 2014;
Senge, 1990). That means for governance to become a strategic driving force of the
university and a powerful integrator able to transform efficiently the potential
intellectual capital into operational intellectual capital (Brătianu & Pînzaru, 2015).
This is a surprisingly stringent test for it rules out a number of obvious candidates for
learning organizations. Many universities fail to qualify, as do many consulting firms.
Even General Motors, despite its recent efforts to improve performance, is found
wanting. All of these organizations have been effective at creating or acquiring new
knowledge but notably less successful in applying that knowledge to their own
activities (Garvin, 1993).
The development model prepared for governments on how countries can maximize
the utilization of human skills defines three key elements: the development of
appropriate competencies, the activation of the competence portfolio, and the active
utilization of acquired competencies (OECD, 2012).
Several important authors on this topic concluded that organizational leadership has a
great influence on the final learning outcome which includes students (Brătianu, 2002,
2015b; Mulford & Silins 2003). Mulford and Silins (2003) examined how school works
as a learning organization, the leadership approach, and the actual results are linked
with one another. They concluded that via its rich impact system, school leadership has
an indirect, but empirically justifiable influence on the learning achievements of
students, and this impact system manifests itself through learning organization
culture.
608 Strategica 2016
Even if they are widely acknowledged it is relevant to check them in as in each specific
context they reveal new possibilities of organizational improvement. Following we
discuss the basic principles and the five disciplines of the learning organization
designed by Peter Senge. Systems thinking is the foundation of a learning organization
that allows understanding the behavior of all components interaction, considered as a
whole, in turn, enables the shift from reaction to the present reality in defining strategy
and objectives for the future. A university is a large and complex organization which
should be able to correlate harmoniously the work of all its components.
"The principle of creative tension is the central principle of personal mastery,
integrating all elements of discipline" (Senge, 1990, p.151). The principle of personal
mastery refers to increasing personal creative development and to discovering
opportunities and challenges in the inevitable changes that occur. Acting this way,
people will be able to learn, to develop their talents, to perform, to preserve the
uniqueness and be continuously connected to the community. We appreciate that
today the principle of personal mastery should combine the concept of lifelong
learning and continuous personal development.
The mental models are defined as simple or complex theories generalizations and they
influence how people perceive reality and thus, decide and act. It is very important that
management should understand these mental models and put them into question
whether it requires changing their surrounding reality. For instance, Marsick’s view of
culture aligns and supports Senge’s mental model discipline. According to the authors,
the mental models with the greatest impact are those shared by key decision makers
within the organization. In order to create a positive ‘mental model’ within the
organization is required openness and accreditation of merits. Openness is a
requirement in learning organizations. The openness must be demonstrated outwardly
and practiced inwardly. Outwardly, openness can foster an environment where
employees are encouraged to contribute and discuss challenges within the
organization. Inwardly, all individuals must be reflective and ready themselves to be
receptive to new ideas (Senge, 1990).
Through the shared vision principle, the leadership must achieve a vision shared by all
its members and thus the organization becomes more efficient in learning. By
overlaying the employee’s mindset upon the organization’s one, it can identify
differences, being able to accept the perspective of the organization. The development
of a shared vision early on is an important step, because it fosters a longer-term
orientation and demonstrates the importance of learning in relationship to the
achievement of the vision (Senge, 1990). Thus shared vision generates employees’
commitment to the strategic objectives of the company but under the freedom of
choice.
The team learning principle supports the idea that the results of two separate people
who think, taken together, are lower than the results of the two teams of thinking,
communicating and acting together. Why? Because of a number of talents, skills,
abilities of the two taken separately is lower than talent, skills, and abilities of the
formed group. Reasoning, communication, and stimulation within the team add more
value than thinking of its members taken separately. Peer learning is more valuable.
Expressions through which Senge describes, not defines, the learning organization are
numerous and compelling. Learning organization is any organization in which you
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 609
cannot learn because learning is so insinuated into the very life of the organization.
Teams, not individuals, are the key learning unit in competitive organizations and are
critical in providing quality service (Senge, 1990).
Thus the valorization of these principles in HES should be possible as there have been
designed so many theoretical models, frameworks, procedures, and methodologies. We
believe that there is much more work to be made for overcoming the obstacles and
barriers of human nature. The overall perspective on universities is still positive as
they are expected to be areas of unlimited and freely knowledge sharing among peers.
However, the practice evidences that this kind of knowledge sharing is barely present
within universities nowadays.
Concluding ideas
Universities like churches are long lasting social institutions. Due to complex
phenomena like social massification, globalization, internet explosive development and
the Bologna process in Europe, universities must adapt to the new needs of society and
enlarge their traditional mission. The main role in this adaptation process is played by
the university governance, which can be defined as the constitutional forms and
processes through which universities govern their affairs. University governance is the
structural and functional framework that underpins the decision making of the
academic leaders (Brătianu & Pînzaru, 2015).
Strategic thinking is based on intelligence and creativity because it searches for the
best outcomes and for creating new knowledge when it is necessary. Taking into
account how fast things change today, we may say that future is coming to us like a
shock wave. Only by developing our capability of generating new knowledge and skills
we may find answers we need for survival and for the challenging competitions that
will come in the near future. We agree to the synthetic point of view of Baráth (2015,
p.1494) who states that “The exponential pace at which knowledge is growing and
how rapidly it becomes outdated as well as the extent of learning affecting our entire
life, all bring learning abilities and attitudes into focus.”
In order to give some directions of recovery for HES, we must retain the following
lessons: 1. The bigger an HEI becomes, the less adaptive it will be once it overgrows its
span of control. 2. HEI’s need to be sensitive to environmental changes even if they are
incremental. 3. HEI’s may not mistake the absence of evidence for evidence of absence.
They must learn “to expect the unexpected" (Taleb, 2012 cited in Janssen, 2015).
Thus, improving the quality of the public education system can only be achieved by
developing the teachers and the institutions. Institutions employing highly qualified
teachers and providing the right conditions for organizational learning, which also
consciously and systematically develop their own knowledge asset (by selecting
training programs and other development forms that are in harmony with their
relevant, motivating and specific objectives) are the ones that are capable of gradually
increasing their students’ results and improving their individual chances in life.
Students prepared this way, who enter the labor market, perform better at work, and
those who have a higher standard of knowledge can enhance their individual
610 Strategica 2016
prospective as employees, thus contributing better to social development by being able
to produce an added value (Baráth, 2015).
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612 Strategica 2016
THE INTEREST IN ENTREPRENEURSHIP AMONG ROMANIAN
STUDENTS
Valeriu FRUNZARU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
valeriu.frunzaru@comunicare.ro
Cristina LEOVARIDIS
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
cristina.leovaridis@comunicare.ro
Abstract. This paper aims to provide an insight into the current state of the students’
interest in entrepreneurship in our country. At the beginning, it comprises a synthetic
overview of the literature on entrepreneurial university and entrepreneurial education
accompanied by an analysis of data offered by the most recent and relevant studies on
youth entrepreneurship conducted in Romania and in other European countries. A survey
conducted by the authors of this paper on students from three Romanian universities
(N=945) shows that the majority of respondents, especially students that study in the field
of economics, are interested in having their own business after graduation. Materialistic
students are more interested in entrepreneurship, thus one of the possible explanations
for this high level of interest in entrepreneurship is the belief that having a business
would bring more money and consequently more happiness. Nevertheless, this study
shows that socio-demographical variables are not significant predictors of the interest in
entrepreneurship. The paper will conclude with a series of concrete recommendations
addressed to the Romanian universities, to encourage and to develop entrepreneurial
skills among students.
Keywords: entrepreneurship; students; entrepreneurial education; university.
Literature review
The old model of higher education institutions was designed and operated to prepare
specialists especially theoretically. Currently, in today's society of knowledge, interests
in the universities expanded, by involving them in activities that fall outside the strictly
didactic aim, i.e. activities which include research, innovation and dissemination of
results of innovation and therefore, requiring them to prepare students with the
knowledge, skills and motivation to create their own businesses.
Thus, a few years ago, Clark (2000) introduced a concept, “the entrepreneurial
university”, to describe the new type of university that is born because of the reaction
of this institution to the changing requirements of the external environment. In
addition, one of the university changes that converts a traditional institution of higher
education in an entrepreneurial one, alongside existing incubators, science parks etc.,
is the even offering programs and courses that promote entrepreneurship among
young people (Mureșan, 2002).
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 613
Entrepreneurial education can help promoting an entrepreneurial innovative culture
by changing values and basic conceptions (Brătianu & Stanciu, 2010). The major
difference between Europe and USA regarding entrepreneurial education is due to the
dynamics of the social systems (Potter, 2008). The Europeans are used to social
protection policies derived from state conception of wellbeing, which offer them a
considerable economic safety, thus determining them not to take high risks. In the USA,
the entrepreneurial education is strongly connected to the business environment; the
professors frequently have a solid experience in developing and management of start-
ups. On the other hand, in Europe, interactive approaches usually based on projects are
also used, but most of the entrepreneurship courses are taught according to a classic
method, and these professors do not have any entrepreneurial experience (Potter,
2008).
Starting a business is not just innate abilities, but also the acquiring of managerial
knowledge. So entrepreneurship as a ”behavior”, as a ”mood” etc. is acquired also by
education; besides those very important innate personal characteristics, it needs a
systematic acquisition, through the education system, of those qualities necessary for
the initiation and management of a business (Leovaridis & Gavra, 2013). People who
want to become entrepreneurs face a difficult environment, a cause being also the lack
of entrepreneurial training within the education system (European Commission,
2013).
More than half of European students do not have access to entrepreneurship
education; specifically 11 million students out of about 21 million students in Europe
do not have the opportunity to participate in a curricular or extra-curricular activity to
encourage their interest in entrepreneurship (European Commission, 2008).
Over half of Europeans want to be employed (58%) and only 37% want to become
entrepreneurs, a percentage that decreased compared to 2009 when entrepreneurship
represented a more attractive (45% of Europeans wanted then to become
entrepreneurs). The employment status remains the preferred option for many
Europeans who feel this way better protected in the face of economic storms. Men
more than women want to be on their own (42% of men would like to start a business,
compared with 33% of women) and young people want more to be their own bosses
than the general population (European Commission, 2012). Also in our country newly
created companies are set up by entrepreneurs who are found mainly in the 30-39
years group (33.3%), followed by the age group 40-49 years; more than half of newly
created enterprises are founded by men (National Institute of Statistics, 2015).
Among European youth, the desire to become an entrepreneur feels more: 45% of
young people aged 15-24 would prefer to be entrepreneurs, compared to only 37% of
those 25-39 years, 36% of the 40- 54 years and 35% of those over 55 years. The main
reasons that young Europeans want to start a business are the prospects of higher
revenues and autonomy (European Commission, 2012).
The entrepreneurial intention represents the necessary condition of the creation
process of new start-ups. Therefore, promoting entrepreneurship among young people
has become a priority for the European policy makers, as a solution to youth
unemployment. Allowing young people to implement their talents and creative ideas
has many benefits: entrepreneurship provides jobs for young people who set up
614 Strategica 2016
business and for the employees of the new company, including the marginalized and
disadvantaged young people; it encourages innovation, competition and alternative
solutions including new models of work organization in a changing market; offers
other young people positive examples of success based on good ideas together with
hard work. In Europe, about 49% of young people aged 15-34 consider the
entrepreneur as a desirable career for them (but only 41% consider it a feasible idea),
a value that varies between Member States, ranging from 32% or less in Britain,
Denmark, Holland, Slovakia, Sweden and Germany, to 57% or more in southern
countries Portugal, Greece, Italy and Croatia, the Baltic countries, Romania and
Bulgaria (Eurofound, 2015). Insufficient information about how to start a business is
considered by 49% of young Europeans obstacles to entrepreneurship, after lack of
funding and financial support (82%) and administrative procedures too complex
(72%), thus the likelihood of young people to become entrepreneurs depends to a
great extent also on the degree of knowledge about how to initiate a business.
Romanian students would rather be entrepreneurs and not employees after
graduation (57%) to a great extent, and most would like to start their own business in
the next two years (52%), although only 11% of active companies in Romania are
owned by young people less than 29 years. Only about a quarter (28%) of Romanian
students believes that the faculty is preparing them to become entrepreneurs “to a
large extent”, almost half (44%) believe that “average” and the remaining one-quarter
(28%) – “to a small extent”. More than half of respondents (56%) consider it
appropriate to start a business after gaining work experience, while 20% would like to
start business immediately after graduation or 19% even during faculty (Ernst &
Young, 2014). The fact that a so high percentage of students (39%) considers desirable
such a step as a student or graduate shows an inclination to entrepreneurship and
risk-taking, but also maybe that students feel ready for such a step from the point of
the acquired education.
The essential role of the entrepreneurial university education is emphasized also by
Amos, Oluseye, and Bosede (2015), who found that entrepreneurial educational
support has a significant relationship with the entrepreneurial intention of university
students. Their survey also showed that informal network has positive significant
effects on the entrepreneurial intention of university students to start their desired
business, which is why the authors recommend that universities should establish
entrepreneurial development centers that will serve as a platform where students with
entrepreneurial intentions can begin their business initiative.
A research conducted by Franco, Haase and Lautenschläger (2010) on nearly 1000
students from western and eastern Germany and central Portugal could not detect any
influence of students’ gender and age or of their social background (having self-
employed family members or friends), on their entrepreneurial intention. On the other
hand, it detected some influence of motives for occupational choice on students’
entrepreneurial intention (“Working on my own initiative”, “Being my own boss”,
“Realizing my business or product ideas” and “Continuing of family tradition” exert a
positive impact).
Testing the influence of social and personal skills perceptions on students’
entrepreneurial intention, Linan (2008) observed that perceived behavioural control
indicates a high level of self-efficacy, which reinforces one’s impression that starting a
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 615
firm is feasible; also, a high level of other skills, such as personal attraction and
subjective norms, helps a lot in the individual’s decision to start a firm. Therefore, a
direct consequence of entrepreneurship education may be that university education
initiatives aiming to increase the entrepreneurial potential of the students should
include courses specifically addressed to the development of those entrepreneurial
skills.
Different studies have focused on the influence of various demographic characteristics
such as previous job, gender, family antecedents, age, ethnicity etc. as factors that
influence the youth interest in creating new firms. Thus, although in general
individuals with lower risk aversion are more likely to become self-employed,
according to Caliendo, Fossen, and Kritikos (2009) this is true only for those
individuals who were previously employed; for previously unemployed or inactive
persons they observed that risk attitudes do not play a role in the decision process.
In addition, Harris and Gibson (2008) associated students’ demographic
characteristics and entrepreneurial experience with more significant entrepreneurial
attitudes: specifically, male students scored higher on both personal control of
business outcomes and innovation in business (as attitude subscales of an
entrepreneurial attitudes orientation survey), and students with family business
experience had more developed entrepreneurial attitudes. Karim and Venkataiah
(2016) confirm that there is a relationship between the student’s gender and the
perception of new venture desirability (male more than female students); more, there
is a relationship between the variable entrepreneurs among relatives and feasibility
perception to create a new firm in the case of MBA students; and there is a relationship
between the variable entrepreneurs among relatives and intention to create a firm –
students with entrepreneurs in their families have thought more seriously to create a
new firm.
The results of Koh (1995) survey also show that students’ interest in entrepreneurship
is significantly associated with psychological, demographic and family characteristics:
more precisely, it is significantly associated with a greater need for achievement,
higher propensity to take risk, more tolerance of ambiguity and greater
innovativeness; from a demographic point of view, entrepreneurial inclination is also
significantly associated with gender (male), birth order (first-born) and the existence
of an entrepreneur in the family.
Regarding the influence of age on interest in entrepreneurship, according to Grilo and
Irigoyen (2005) the probability of being self-employed increases with age and the
probability of preferring self-employment decreases with age, due to youth
characteristic of lower risk-aversion. However, although young people desire to be
self-employed, only a few are also, due to lack of capital: “as time goes by, some of them
seize the opportunity of becoming self-employed, which explains why older cohorts
display a higher fraction of self-employment” (Grilo & Irigoyen, 2005, pp.14-15).
Other authors use the national dimension as a driver of their research: aiming to
identify differences among some selected nations (US, Korea, China and Fiji) in terms
of factors that are important to enhance the pedagogical effect of entrepreneurship
education, Lee, Lim, Pathak, Chang and Li (2006) found that the unique cultural
context of each country differentiated students from the four countries in terms of
616 Strategica 2016
intention of venture creation, confidence in venture creation, and intention of overseas
venture creation: consequently, each country has to offer an “entrepreneurship
curriculum” centred on those factors identified as relatively weak factors, in order to
increase their students’ interest in beginning an entrepreneurial career.
Against this theoretical background, our study aims to find answers to the next
research questions:
RQ1. What is the level of students’ interest in entrepreneurship?
RQ2. Is there a relationship between socio-demographical characteristics and students’
interest in entrepreneurship? In this regard, we will consider the next socio-
demographical variables gender, age, and parents’ income or level of education.
RQ3. Is there a relationship between students’ field of study and students’ interest in
entrepreneurship? We can hypotheses that students in economics are more interested
in entrepreneurship than students in communication or in engineering.
RQ4. Is there a correlation between students’ interest in entrepreneurship and self-
efficacy? Considering previous findings, we can hypothesize that the higher is the level
of self-efficacy the higher is the level of students’ interest in entrepreneurship.
RQ5. Is there a correlation between students’ interest in entrepreneurship and
materialism? Based on the fact that we live in a consumption society where people
believe that position and acquisition of goods bring happiness (Atay, Sirgy, Husić &
Čičić, 2010; Belk, 1985; Richins & Dawson, 1995), we can hypothesize that materialists
have a higher interest in entrepreneurship.
Method
Sample
The sample (n=945) comprised both undergraduate (n=568) and master students
(n=377) from three university fields of study: communication (n=530), economics
(n=203) and engineering (n=212). The students’ age ranged between 18 and 51 (mean
= 22.60) and almost 90% of them were younger than 25. The majority of students were
women (n=634). Questionnaires were administered collectively during class and took
approximately 20 minutes to complete. Anonymity was guaranteed.
Measures
To measure students’ interest in taking an entrepreneurial career we asked them on a
Likert-type scale how much is important to them to have their own business after
graduation.
Self-efficacy was measured with a ten-item scale available at IPIP (2016) and
respondents expressed their agreement to each of the items on a seven-point Likert
scale, ranging from 1 (strongly disagree) to 7 (strongly agree). Two representative
items for this scale are “I complete tasks successfully” and “I misjudge situations”. The
second one is a reverse item.
Materialism values were measured with a six-item scale developed by Marsha L.
Richins (1987). Two items representative for this scale are “I would like to be rich
enough to buy everything I want” and “People place too much emphasis on material
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 617
things”. The second one is a reverse item. Both self-efficacy and materialism scales are
reliable (Crombach alpha were .76 and .73).
Findings
Over 55% of the students from our sample consider that it is important and very
important to have their own business after graduation (Figure 1). This data confirms
previous finding (Ernst & Young, 2014) that showed that 57% of students prefer to be
entrepreneurs and not employees after graduation. Moreover, considering that only a
small percent of students (4.2%) says that it is not at all important to have their own
business after graduation, we can state that Romanian students show, to a rather high
extent, an interest in having their own business instead of being employed.
Figure 1. How much important is that after graduation to have your own business?
Regarding the second research question, the findings show that there is not a
relationship between the socio-demographical characteristics and students’ interest in
entrepreneurship. So men and women have a similar interest in having such a career
(t(911)=-.445, p=.66). Regarding family, mother’s education (r=-.01, p=.83), father’s
education (r=-.01, p=.72) and family income (r=.04, p=.22) does not correlate with the
interest in entrepreneurship. These findings advocate the view that family (at least the
variables taken into consideration in our study) has not an impact on students’ interest
in entrepreneurship. One possible explanation stems from the fact that in Romania
there is not a family tradition considering that the communistic regime ended only 26
years ago yet. Nevertheless, a future qualitative study is needed to explore these and to
offer other possible explanation to this data.
Students in management are more interested in having their own business compared
to students in communication and in computer science (F(2) = 12.519, p <.01). The
average score was 3.49 for the students in communications, 3.54 for those in computer
science and 3.98 for students in management. Among the possible explanations are the
different motivations of candidates that enroll in these university fields of study. These
results would indicate that some students study management in order to learn how to
manage a business.
618 Strategica 2016
There is not any relationship between self-efficacy and the students’ interest in
entrepreneurship (r=0.05, p=.18). Therefore, no matter how much students believe in
their ability to complete tasks or to succeed, they show interest in having their own
business instead of being an employee.
Happiness seeking via consumption is a characteristic of materialistic people in the
context of consumption society. These people consider that acquisition and possession
of goods would bring them happiness and would show to others how successful they
are (Richins & Dawson, 1992). People higher in materialism consider that if they had
more money they would be happier. Thus, we can expect that students who share
these kinds of values to a higher extent are more interested in having their own
business after graduation. Our study confirms that there is a significant positive
correlation between materialism and students’ interest in entrepreneurship (r=.13,
p<.01). Even if this correlation is small, it reveals that one possible motivation for
entrepreneurship is the belief in money as a source of happiness.
Conclusions
This paper confirms previous studies regarding the high level of interest in
entrepreneurship among Romanian youth. Our study conducted on Romanian students
shows that socio-demographical variables such as gender, the parents’ education, and
the family income are not significant predictors of their interest in having their own
business after graduation. One possible explanation for the interest in
entrepreneurship is the students’ belief in money as a source of happiness. Thus, the
higher is the level of materialism the higher is the students’ interest in
entrepreneurship.
In this context, entrepreneurial university education may have an essential role, as
Amos, Oluseye, and Bosede (2015) showed, in developing entrepreneurial intention of
university students. Universities must contribute to encouraging and to build
entrepreneurial skills especially among those students who consider entrepreneurship
career, offering them continuing entrepreneurial education.
Entrepreneurial education should consist not only in teaching introductory and
advanced courses on entrepreneurship (formal entrepreneurial education) such as
finances, marketing, management, business law etc., covering all skills necessary for a
start-up entrepreneur. Moreover, it should provide a system of various co-curricular
activities (informal entrepreneurial education) such as: competitions of business ideas
and business plans and pitching to business angels and other investors, simulations of
“create and manage your own business” type, internships in entrepreneurial
companies, meetings and workshops with entrepreneurs for finding their success
stories, university business incubators and accelerators in order to generate students’
start-ups, networking programs creating links between interested students on the one
hand and mentors or potential investors on the other hand.
It should be noted that these findings are based on a survey conducted only in three
universities in three fields of study. Future research could investigate a larger and a
more diverse sample of students from more universities that attend more areas of
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 619
study. Furthermore, a qualitative research could bring deeper explanations regarding
our findings and may portray other possible reasons of students’ interest in
entrepreneurship.
References
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Satisfaction. Market, XXII(2), 151-166.
Amos, A.O., Oluseye, O O., & Bosede A.A. (2015). Influence of Contextual Factors on
Entrepreneurial Intention of University Students: The Nigerian Experience,
Journal of South African Business Research. Retrieved from
http://www.ibimapublishing.com/journals/JSABR/2015/750622/750622 .pdf
Belk, R.W. (1985). Materialism: Trait Aspects of Living in a Material World. Journal of
Consumer Research, 12(3), 265-280.
Brătianu, C., & Stanciu, Ș. (2010). An overview of present research related to
entrepreneurial university, Management&Marketing, 5(2), 117-134.
Caliendo, M., Fossen, F., & Kritikos, A. (2009). Risk Attitudes of Nascent Entrepreneurs:
New Evidence from an Experimentally-Validated Survey. Small Business
Economics, 32(2), 153-167.
Clark, B.R. (2000). Towards an entrepreneurial university [Spre o universitate
antreprenorială]. Bucharest: Paideia.
Ernst &Young (2014). Barometer of education and entrepreneurial culture among
young people. Romania 2014 [Barometrul educației și culturii antreprenoriale
în rândul tinerilor. România 2014]. Retrieved from
http://www.eyromania.ro/sites/default/files/attachments/barometruleducatie
isiculturiiantrepre noriale2014.pdf.
Eurofound (European Foundation for the Improvement of Living and Working
Conditions) (2015). Youth entrepreneurship in Europe: Values, attitudes,
policies. Luxembourg, Publications Office of the European Union. Retrieved from
http://www.eurofound.europa.eu/sites/default/files/ef_publicatio
n/field_ef_document/ef1507en.pdf.
European Commission (2013). Entrepreneurship 2020. Action Plan. Reigniting the
entrepreneurial spirit in Europe. Retrieved from http://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:5201 2DC0795&from=RO.
European Commission (2012). Flash Eurobarometer 354 - Entrepreneurship in EU and
Beyond. Retrieved from
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European Commission (2008). Survey of Entrepreneurship in Higher Education in
Europe. Main Report. Retrieved from
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https://www.gouvernement.lu/5694491/doc_entrepreneurship_eu.pdf.
Harris, M.L., & Gibson, S. (2008). Examining the Entrepreneurial Attitudes of US
Business Students. Education and Training, 50(7), 568-581.
620 Strategica 2016
IPIP (2016). International Personality Item Pool. A Scientific Collaboratory for the
Development of Advanced Measures of Personality and Other Individual
Differences. Retrieved from http://ipip.ori.org/.
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Lee, S.M., Lim, S., Pathak, R.D., Chang, D., & Li, W. (2006). Influences on students
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Entrepreneurship and business performance [Antreprenoriatul și performanța în
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Intentions? International Entrepreneurship and Management Journal, 4(3), 257-
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Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 621
FOSTERING STUDENTS' INTEREST FOR EXPERIENTIAL LEARNING -
THE CASE OF GRENOBLE DIGITAL MARKETING BOOTCAMP
Alexandru CĂPĂŢÎNĂ
Dunărea de Jos University of Galați
41 Domneasca St., Galați, Romania
acapatana@ugal.ro
Gianiţa BLEOJU
Dunărea de Jos University of Galați
41 Domneasca St., Galați, Romania
gbleoju@ugal.ro
Emilie HOAREAU
Grenoble Alpes University
621 Avenue Centrale, 38400 Saint Martin d'Hères, Grenoble, France
emilie.hoareau@univ-grenoble-alpes.fr
Abstract. Tracking up to date knowledge insights, this research explores untrained
practices of experiential learning within a Web Marketing community of users (Grenoble
Digital Marketing Bootcamp) in order to discover new perceived benefits of the
simulation and gamification. Mobilising Web Marketing techniques to support and guide
students’ interest through experiential learning toward intelligent structuring of the
knowledge acquisition process, the field-tested research ensures students fitting of
perceived benefits to observable ones, enhancing students’ reactivity upon future business
anticipate complexity. The authors declare the current research ambition as an
innovative contribution to experiential learning toward Information Systems Design,
grounded on Web Marketing technological rules.
Keywords: experiential learning; Web marketing; simulation; gamification; bootcamp.
Introduction
Practicing Web Marketing supposes to know how to mobilize a set of techniques such
as Search Engine Optimization, Search Engine Advertising or emailing campaigns.
Students as futures marketers have to be consciously prepared in order to be able to
cope with the complexity of Web marketing issues. Effective training can be made by
Experiential Learning approaches which focus on experimentation in real-life
situations. Serious games especially simulation, allows participants to experiment
business scenario without risks of financial loss and damages in terms of brand image.
Consequently, simulation game offers the possibility to provide experiential learning
benefits. Based on the case of the Grenoble Digital Marketing Bootcamp, we propose to
explore how a Marketing simulation games platform can provide experiential learning
benefits. In this way, in a first section, we provide new teaching methods to support
experiential learning as a theoretical background.
622 Strategica 2016
Second, we describe Simbound, a new serious game relating to Web Marketing issues.
Next, we present the results of the experimentation of Grenoble Digital Marketing
Bootcamp. The conclusion is a synthesis of our approach and propositions for future
research relating to Experiential Learning approach during the sessions of the serious
game.
Theoretical background: Web marketing innovative teaching methods to
support experiential learning
Experiential learning theory (ELT) has been widely used in business research and
practice. Building on the foundational works of Kurt Lewin, William James, John
Dewey, Carl Rogers and Paulo Freire, ELT model emphasizes two dialectically related
modes of grasping experience – Concrete Experience (CE) and Abstract
Conceptualization (AC) and two dialectically related modes of transforming experience
– Reflective Observation (RO) and Active Experimentation (AE) (Kolb & Kolb, 2012).
The experiential learning approach to teaching marketing emphasizes “hands-on”
experiences and experimentation activities; the “hands-on” activities must be
correlated to “minds-on” exercises to complete the learning cycle and provide
meaningful conceptual understanding (Young, 2002). The online business moves
beyond the traditional teaching of Web Marketing to students in two key ways:
providing students experience in Internet skills and experience in conducting an online
business with highly challenging demands (Daly, 2001). Although both experiential
learning and Web 2.0 tools focus on creativity, sharing and collaboration, few studies
have been conducted on specific ways of integrating a Web 2.0 paradigm with
experiential learning in Marketing (Granitz & Koernig, 2011).
Web Marketing innovative teaching methods, such as simulation games, are designed
to generate a dynamic content and are most successful and engaging when they
facilitate the flow experience; thus, the experiential gaming model consists of an
ideation perspective, an experience perspective and a challenging bank (Kiili, 2005).
Based on the high-speed development of Web 2.0 tools, the model of the Web
Marketing outcome-driven, experience-based learning is emerging, being a great way
for instructors to renew and accumulate their knowledge and facility of teaching while
committed to instructional activities (Huang & Behara, 2007).
The most comprehensive insights on the application of Lewinian cycle of experiential
learning in simulation and gaming (Ulrich, 1997) reveal a clear understanding of what
happens exactly during simulation games (Table 1).
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 623
Table 1. The Lewinian cycle of experiential learning applied in simulation and gaming
(Ulrich, 1997)
Kolb’s Concrete Reflective Abstract Active
experiential experience observation Conceptualisation Experimentation
learning (CE) (RO) (AC) (AE)
cycles
Simulation The schematic Game Game designers A modified
game depicts the designers condense the version of the
development: system for evaluate the findings into an schematic is
Design of which the feedback of the enhanced developed and
schematic simulation interviewees description of the presented to the
game is and system. same key persons,
designed. adjust their thus closing the
understanding cycle.
of the system.
Simulation The prototype The outcome Flaws and A new version
game of a simulation of strengths of the prototype is
development: game is tested the test run is are identified and developed.
“Rule of 10” in a test run carefully concepts to
with selected evaluated. improve
people. the prototype are
elaborated.
Game cycle Participants Participants Participants gain Experimentation
experience the evaluate an with new ways of
consequences during a understanding of decision-making
of their brief meeting what had happened in the following
activities their and elaborate new cycle.
either by the actions, strategies.
feedback from strategies, and
teammates or decisions in
from the the last cycle.
simulation
model.
Entire Simulation Debriefing part Debriefing part II Application of the
simulation game session I: Participants Participants insights and
game activity (the describe their evaluate the gathered
participants feelings and significance of the knowledge in real
immersed in experiences experiences within life
the game during the run. a wider context and
activity). with respect to
theories and to real
life.
Recalling marketing practitioners facing real business challenges, through different
approaches of risk-free environment related to gaming, the above game cycle exposes
significant learning challenges, pivoting around group decision consequences
awareness, in order to gain confidence in the superiority of experiential learning
among the myriad of simulation techniques.
The innovative approach exposed above (Table 1) allows the design of an Actionability
Framework, which exposes the architecture of interdependencies between
experiential learning & gaming through instantiating micro-cycles: concrete
experience -reflective observation.
624 Strategica 2016
The interactional approach emphasized by the Actionability Framework overcomes
the vulnerabilities of simulation techniques and proposes an innovative approach to
addressing learning gaps of separate instructional programs.
Being able to structure the link between experiential learning and simulation &
gaming, the Actionability Framework underlines both content generation (new
scenarios to experiment) and emphasizes new insights toward supervised switching
Web Marketing technological rules.
Moreover, the Actionability Framework is systematically monitoring student capturing
knowledge over critical Web Marketing capability areas:
- Understanding scenario Web Marketing metrics;
- Capturing customer value features pivoting current Web Marketing metrics;
- Gaining insights about current versus valuable Web marketing measurement;
- Understand the difference between metrics (profit per customer) and track
(customer recognition);
- Revealing the difference between data intelligence and knowledge;
- Generating new metrics for creative needs;
- Aligning intelligent targeting& Web Marketing technological rules;
- Generating new scenarios through extracting knowledge from group skills over Web
Marketing techniques benefits and limits experimentation.
The highly interactive experiences related to experiential learning methods can be
adapted to meet the creative needs and interests of the players involved in serious
games communities, by inspiring them to discover solutions and responses to the
challenges determined by the necessity to upgrade the knowledge base (Capatina &
Bleoju, 2015).
Using experiential methods in education and training has many benefits beyond
traditional forms of instruction. Student motivation has been shown to be a great asset
when using simulation, which increases students’ interest and participation in learning
activities. Experiential methods further support the benefits of immersing learners in
interactive environments that replicate situations that they might encounter on the job
(Hale Feinstein, Mann & Corsun, 2002). In the experiential learning and gamification
contexts specifically, research studies predict that gamified curricula will become more
attractive for universities, as a method to invoke students’ engagement (Hamari et al.,
2016).
The educational technology enables students to experience a simulation of near-real-
life business contexts with large information systems, allowing them to gain and
develop competencies and skills in a setting that reflects the interconnections of the
real business world (Ruhi, 2016). Simulations require reflection from the part of
learners, considered as being a key part of experiential learning and a common feature
in many gamification scenarios and activities (Girvan, Conneely & Tangney, 2016).
There is a growing hybrid of simulation and games that are essentially decision-
making systems that require players to make a series of decisions in an environment
with realistic scenarios, which enables players to experience the consequences of their
decisions by providing them with real-time feedback (Loon, Evans & Kerridge, 2015).
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 625
Simbound: a serious game focused on experiential learning benefits
Simbound is the world’s first Web Marketing simulation which provides a unique
experience without any financial risk for learners, trying to change online marketing
teaching and learning, from a classical to an experiential one. The gamification
platform is perfectly designed for Web Marketing courses, offering an interface that is
similar to that of commercial solutions (e.g. Google AdWords); while results are being
computed, using algorithms that replicate those of search engines (Walsh, 2012).
By using simulations, marketers can keep up with a constant stream of product
innovation and are able to evaluate how new technologies and features impact their
particular communications. Learning with simulations enables rich scenarios in which
the learner faces challenges of the kind that could be encountered while working on a
real client project (Havriliuc, 2014).
The coordinator of a Simbound-based competition is able to assess players’ learning
progress, by analyzing the Search Engine Marketing and E-mail campaigns that they
have previously created, as well as the landing pages they added to their websites
(Capatina, 2015). Learning from previous rounds’ experience is facilitated by a multi-
criteria tracking system: engagement (time spent logged in by each student, number of
decisions taken, and also activity on the platform community), reach (ad impressions,
conversions or number of clients) and profitability (cost per acquisition, return on
advertising spend, overall profit). Participants in Simbound competitions discover the
Lewinian model of experiential learning in a simulation game. Later, they would be
able to apply this learning model in a real Web Marketing campaign, thus propagating
this mode of learning beyond the simulation game activity.
Simbound’s design of the learning experience offers the possibility to learn from
consequences of decisions made by the students; they are actively engaged in
exploring ways to better perform in the next rounds, assuming responsibility and
experimenting creative SEM (Search Engine Marketing) campaigns. The experiences
proposed by Simbound are structured to engage students in a way that leads to the
perception that the learning tasks are authentic in the gamification scenarios.
The dynamic learning framework proposed by Simbound can help students to develop
interests in the fast-growing field of Internet Marketing, but also to gain a practical
experience and proficiency with “hands-on/minds-on/hearts-on” activities (Figure 1).
Hands-on means that Simbound players learn better when they are fully engaged in
finding ways to optimize their SEM and E-mail Marketing campaigns; minds-on reflects
the meaningful activities and experiences that Simbound proposes to challenge its
players’ minds, while hearts-on highlights that Simbound players’ learn the best when
they are emotionally involved in their attempt to win the competition, being at the
same time inspired by their peers’ outstanding results.
626 Strategica 2016
Figure 1. Simbound’s experiential learning proposal: “hands-on/minds-on/hearts-on”
The students who most likely have not had any experience with SEM are starting to
behave and conduct Web Marketing campaigns as experienced professionals.
Moreover, the serious game content experience with instant feedback encourages
multiple interactions with other learners and offers valuable opportunities to improve
a player status inside the Simbound online community.
Experiential learning in practice: The case of Grenoble Digital Marketing
Bootcamp
Grenoble Digital Marketing Bootcamp was a competition dedicated to Master students
from IAE Grenoble – University Grenoble Alpes, France, interested in developing their
skills related to managing Web Marketing campaigns, in an experiential learning
approach powered by Simbound Content Marketing Simulation (www.simbound.com).
The event took place in the period 7th of April – 8th of April and 29 students from a
Master program in Management Information Systems were involved in the
competition, being grouped in five teams (Bluberries, Zouheir United, Orange
Mecanique, Chartreuse, Mouss).
The teams were involved in a wide range of Web marketing decision-making
processes: Managing Paid Placement of Ads on Search Engine Results Pages
(commonly referred to as search Engine Marketing), sending out E-mail newsletters to
a virtual list of subscribers and managing Website Landing Pages (Figure 2).
Figure 2. The portfolio of landing pages, PPC and Email campaigns managed by Grenoble
Digital Marketing Bootcamp teams
Simbound’s proposal of experiential learning coupled with targeted feedback from the
part of coordinator enhanced the quality of Grenoble IAE Master students’ learning. As
the players involved in Grenoble Digital Marketing Bootcamp proved the mastery of
intermediate learning goals, they constantly moved on to more advanced challenges.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 627
Even more important, because the Simbound simulation game provides a realistic
learning environment, the focus is on learning progress (Figure 3), which enables
players to apply the right knowledge at the right time.
Figure 3. Learning progress within Grenoble Digital Marketing Bootcamp
Learning Progress compares performance across decisional rounds and highlights the
evolution of the Return on Advertising Spend (ROAS) or Value/Cost, which outlines the
dynamics of the amounts of virtual money earned from ads compared to the dynamics
of the amount of virtual money spent on ads (Figure 4).
Figure 4. The effect of experiential learning on aggregate financials within Grenoble Digital
Marketing Bootcamp
The Grenoble IAE Master students’ perceptions regarding the extent in which
Simbound provides them opportunities of experiential learning on Digital Marketing
were explored, at the end of the game, by means of a satisfaction survey, posted on the
event’s Facebook dedicated page. The results (92% participants in Grenoble Bootcamp
were very satisfied, while 8% more than satisfied) prove the recognition of
experiential learning benefits of the serious game they were involved in. The students
really appreciated the fun and engaging experience provided by Simbound, which
proved to be an interesting educational tool, able to create a friendly competition
among them.
628 Strategica 2016
Conclusions and future research agenda
One the main benefits of experiential learning in the particular context of Simbound is
represented by the simulation platform’s capability to share knowledge related to
optimization of campaigns through a multi-channel approach and trying to perform
better in the next rounds in order to achieve the targets.
This study proves that fostering students' interest in experiential learning is
compulsory through stimulating their reactivity toward gaining new knowledge and
content adjustability assessment.
A comparative approach between previous Simbound competitions, focused on
searching commonalities or valuable differences between teams, would be able to
enhance the value of experiential learning and simulation & gaming, in order to gain
insights for transforming the Actionability Framework into a testable solution.
Furthermore, the community of practice expertise is compulsory to check the research
framework validity and robustness: content solidity, methodological accuracy and
business pertinence.
We are eager to perform during further research fuzzy-set qualitative comparative
analysis (fsQCA) in order to explore the influence of antecedents conditions (the
engagement of players involved in Simbound community in the collaborative decision-
making process, as well as their results – provided by Simbound platform in Reach and
Profitability sections) on the overall rankings of teams involved in different
competitions, developed at the level of two universities: Grenoble Alpes University,
France and “Dunărea de Jos” University of Galați, Romania.
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630 Strategica 2016
USES AND GRATIFICATIONS OF FACEBOOK AMONG ROMANIAN
GRADUATE STUDENTS
Oana ŞTEFĂNIŢĂ
National University of Political Studies and Public Administration
30A Expozitiei Bvd., Sector 1, 012104, Bucharest, Romania
oana.stefanita@comunicare.ro
Georgiana UDREA
National University of Political Studies and Public Administration
30A Expozitiei Bvd., Sector 1, 012104, Bucharest, Romania
georgiana.udrea@comunicare.ro
Raluca BUTUROIU
National University of Political Studies and Public Administration
30A Expozitiei Bvd., Sector 1, 012104, Bucharest, Romania
raluca.buturoiu@comunicare.ro
Nicoleta CORBU
National University of Political Studies and Public Administration
30A Expozitiei Bvd., Sector 1, 012104, Bucharest, Romania
nicoleta.corbu@comunicare.ro
Abstract. This paper investigates the “uses and gratifications” of Facebook among
Romanian graduate students by identifying specific motivations, uses and benefits of this
social networking site with a focus on online image construction. Although the uses and
gratifications theory was developed in relation to traditional media, as the use of social
media has spread widely in society, recent studies applied the theoretical framework to
new media. Reference communication and media studies advance the idea that each
medium offers a different set of gratifications according to their features and
characteristics. The uses and gratifications theory suggests that audiences actively seek
out media through a goal-oriented approach in order to gratify their needs. Research
regarding Facebook usage patterns shows that this social network is used primarily to
maintain contact with others, to keep up-to-date on friends’ activities, to learn more
about someone or about social events. This paper focuses on identifying what drives
individuals to use Facebook and what are the main usage patterns in the case of
Romanian graduate students, as well as their perspectives on Facebook use and online
image construction. The study is based on a qualitative research consisting of 21 in-depth
interviews, conducted in January 2016 with master’s students in the broad area of
communication. The research questions guiding the analysis focused on Facebook use
and types of gratifications, and on how much students engage in constructing an online
image.
Keywords: Facebook; gratifications; online image construction.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 631
Introduction
Research studies so far indicate that the general evolution of society has led to the
cultivation of its members’ creativity, in the sense that they have always been
preoccupied to find new ways to connect with each other, “beyond simply their
physical reach” (Dimmick, Ramirez Jr., Wang & Lin, 2007, p.806). In this context, the
emergence of new communication mediums offers new patterns in terms of usage, as
compared to other types of (traditional) media. Besides the main focus of building and
maintaining social networks, self-disclosure and gaining popularity among peers are
important aspects when using social media (Hew, 2011). Other reasons for Facebook
use regard the passing of time, entertainment, trend-following, and companionship
(Sheldon, 2008).
Facebook users also involve in creating and maintaining an online image to attract
social acceptance and appreciation, most of the time, the users are presenting the best
version of themselves, and constructing an ideal self (Siibak, 2009). Self-affirmation
through Facebook is justified by people’s need to see themselves as valuable and
worthy, thus motivating them to create a positive image of themselves by avoiding or
distorting information that might trigger negative reactions or might affect their
desirable self-presentation (Sherman & Cohen, 2006).
In terms of gratifications, these have a greater value for active users. Passive users just
monitor other people’s content without engaging or communicating, while active users
have all sorts of information exchanges both targeted and non-targeted (Burke,
Marlow & Lento, 2010; Matook, Cummings & Bala, 2015; Verduyn et al., 2015).
Facebook use correlates with gratifications related to relaxation, entertainment, social
interaction, self-status seeking and information-seeking (Smock, Ellison & Lampe,
2011).
This paper addresses the uses and gratifications of Facebook, the motivations behind
Facebook usage patterns, and the level of engagement in self-promotion and online
image construction.
Facebook uses and gratifications
Social networking sites, among which Facebook seems to be the most popular, are
used for quite a wide variety of purposes, varying from maintaining contact with other
people to self-affirmation and online image construction (Ellison, Steinfeld & Lampe,
2007; Lampe, Ellison & Steinfeld, 2008; Raacke & Bonds-Raacke, 2008; Toma &
Hancock, 2013). According to the uses and gratifications theory, initially developed in
relation with traditional media outlets (Katz, Blumler & Gurevitch, 1973, 1974),
researchers suggest that the audience is an active actor within the media context (also
see LaRose, Mastro & Eastin, 2001). Katz, Gurevitch and Haas (1973) put forth a list of
35 basic human needs that could be satisfied through the use of mass-media; they
categorize them as follows: cognitive needs (i.e., strengthening information,
knowledge, and understanding); affective needs (i.e., strengthening aesthetic,
pleasurable, and emotional experiences); personal integrative needs (i.e.,
strengthening credibility, confidence, stability, and status); social integrative needs
632 Strategica 2016
(i.e., strengthening contact with family, friends, and the world) and tension release
needs (i.e., escaping and diversion).
Applying the uses and gratifications theory to newer media outlets in general and to
Facebook in particular, recent investigations concentrate on finding out the main
motivations that drive people to use this particular social networking site (e.g. Gelmez
Burakgazi & Yildirim, 2014; Greer & Ferguson, 2015; Papacharissi & Mendelson, 2011;
Valenzuela, Bachmann & Aguilar, 2016). There are at least nine types of different
Facebook uses (Ellison et al., 2007; Krisanic, 2008; Nyland, 2007; Papacharissi &
Rubin, 2000; Ruggiero, 2000): the use to meet people; the use for entertainment; the
use to maintain relationships; the use for social events; the use to share media
products; the use for product inquiry; for discussion and self-disclosure; for
information and the use for impression management and self-affirmation. Facebook
uses could vary according to users’ individual characteristics such as age, gender,
personality traits, as well as due to contextual variables such as the social and political
context (also see Frison & Eggermont, 2016; Fullwood, Nicholls & Makichi, 2015; Hew,
2011; Kwon, D’Angelo & McLeod, 2013; Quan-Haase, Martin & McCay-Peet, 2015).
According to Ramirez Jr., Dimmick, and Feaster (2008, p.531), “gratification
opportunities are properties of a medium that allows users to overcome time and
space constraints and, in effect, amplify or attenuate the ability to derive satisfaction
from a medium”. In this context, the empirical analyses of gratifications associated
with the use of Facebook are based on previous studies which concentrated on
gratification needs satisfied through the use of traditional media. On this line,
researchers identified six main motivations that might drive people to use Facebook:
relationship maintenance, the passing of time, community building, entertainment,
trend-following, and companionship (Sheldon, 2008). Likewise, Lai and Yang (2014)
suggest that there are two main categories of gratifications, namely utilitarian (e.g.,
interpersonal utility, which means keeping in touch with other people, maintaining
relationships) and hedonic gratifications (e.g., entertainment). The authors also point
out that these two categories practically imply five gratification needs: interpersonal
needs – refer to using Facebook in order to create and maintain relationships at an
interpersonal level; enjoyment needs – refer to using Facebook features in order to
pass time and experience pleasure; immersion needs – refer to the escapist feeling
provided through the use of Facebook; achievement needs – refer to the desire to win
and outrank other people; the pursuit of fashion – refers to the desire to follow the
mainstream behaviour in order to get and maintain a sense of belonging to a group
(also see Sheldon, 2008; Smock et al., 2011).
Strictly referring to the utilitarian dimension of Facebook and, even more specifically
to the idea that Facebook enables people to keep in touch with one another, Joinson
(2008) suggests two functions of this dimension – the surveillance function, which
refers to the desire to see what old contacts and friends are up to, how they look, and
how they behave; and the social searching one, which refers to the desire to maintain
and reconnect with offline connections (also see Quan-Haase & Young, 2010).
To sum up, studies suggest that the uses and gratifications of Facebook are quite
similar to those fulfilled by traditional media outlets and include relaxation,
entertainment, and information-seeking. However, new media seems to function as a
medium that completes traditional media in terms of gratifications.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 633
Online image construction through Facebook
As previously discussed, there are a series of motives that drive people to use
Facebook. In this context, online image construction is highly referred to, mainly
because it involves a quite prevalent practice among young Facebook users. Initially
designated to communication purposes, Facebook has been transformed into a social
network where people might seek social acceptance. As Farquhar (2012) puts it,
Facebookers might look for this type of acceptance by self-presenting and express in
the best light possible. This top position of the self-derives from the theory comparing
the actual and the ideal self; people tend to position themselves only in idealized
circumstances in order to increase their chances to be accepted and agreeable
(Goffman, 1969; Moretti & Higgins, 1990). Facebook users permanently analyze if and
how other people regard their actions in terms of effectiveness and (re)consider them
so that they will be further accepted. For example, when publicly sharing content (i.e.,
images and videos of themselves), individuals tend to be very careful and upload only
that content that they believe that makes them “look attractive, social, funny, and
thoughtful” (Farquhar, 2012, p. 448).
The idea that individuals tend to present themselves in a positive light within social
networking sites is in close relation to the self-affirmation theory. According to Toma
and Hancock (2013), the main premise of this theory is that people’s fundamental need
is to see themselves as valuable and worthy. Thus, sometimes unintentionally, they
distort or avoid information that threatens their self-worth and, vice versa, they value
the information that reinforces it. Trying to adapt this theory to Facebook use, the
same authors point out the main reasons why it might apply to social networking sites
as well. Given the fact that people are concerned to represent the key aspects of the
self, and, even more importantly, because self-representation is shown in a network of
close personal relationships, “it is plausible that Facebook profiles may constitute a
venue for self-affirmation and that users gravitate toward them in an unconscious
effort to elevate their perceptions of self-worth and self-integrity” (Toma & Hancock,
2013, p.322). Noteworthy, the impression management in the online environment
“varies according to the expectations of the reference group at hand” (Siibak, 2009).
Thus, as the authors suggest, the virtual selves that are publicly offered are
permanently (re)constructed in order to fit the values related to the ideal and actual
self.
In conclusion, based on the uses and gratifications theory in the broader context of
communication, we might argue that Facebook might be a useful tool in developing
online identities, and thus, in the process of online image construction.
Research methodology
In order to analyze the types of Facebook uses and gratifications among Romanian
graduate students as well as their focus on online identity management, we conducted
a qualitative research, namely 21 semi-structured, in-depth interviews. The interviews
were carried out in January 2016 with master’s students in the broad area of
communication, from the National University of Political Studies and Public
Administration.
634 Strategica 2016
The main goal of this paper was to identify what drives individuals to use Facebook,
the main usage patterns in the case of Romanian graduate students, as well as their
perspectives on Facebook use and online image construction. There were two main
questions that guided our research: RQ1: What are the uses and gratifications of
Facebook among Romanian graduates? RQ2: To what extent and in what ways do
Romanian graduates use Facebook for self-affirmation and online image construction?
Thus, we were interested in uncovering students’ uses and gratifications of Facebook,
their perceptions regarding the reason why others might (not) use Facebook, how
much they use/perceive Facebook as a source of information, as an instructive or
relaxing tool, as a method to overcome boredom, and how much they engage in
constructing an online image.
The sample used in this research study comprises 21 Romanian graduates, aged
between 22 and 30 years old. The interviewees were all pursuing a masters’ degree,
and a part of them was already employed. They usually spend between 1 to 10 hours
per day on Facebook, mostly between 3 and 6 hours daily, having a discontinuous
activity. Their profiles range between 140 and 3000 friends; the majority of
interviewees considering themselves as active users, while the rest engage in passive
consumption. We expect that one of the most mentioned gratifications of Facebook will
be related to the concept of impression management, being concurrently one of the
gratifications fully developed besides identity and self-other relationships, due to the
emergence of new technologies and growing use of social media (Farquhar, 2012;
Lampe et al., 2008).
Findings and discussion
The uses and gratifications of Facebook among Romanian graduates
Main findings prove that the interviewees have mixed opinions related to spending
time in the virtual environment. Although they can easily access information, contact
and stay in touch with others, share and find more about various persons, most people
think they end up wasting a lot of time, becoming addicted to checking what others are
doing and also feeling the urge to post and compete in creating the image of a
satisfying and beautiful virtual life, but missing to have a “real” social life
(“Unfortunately, some people live in this virtual world more than they do in real life.
When I go out and look around, everyone sits with a phone in their hand forgetting to pay
attention to the people near them, which is not normal”, Andreea, 22).
The interviewees have all sorts of activities on Facebook, the most preponderant ones
being posting pictures and checking for updates from friends and pages they follow.
Other actions include posting of media content, sharing, commenting, expressing
opinions, liking friends’ posts, communicating on messenger or on groups. Almost all
respondents tend to mostly post pictures, sharing their special events, travels or group
photos. Although the content is mostly personal, some of the respondents share work
related updates and content, and all of them pay attention to the image they spread
about themselves, to what their posts are communicating about them, how they look in
the pictures and if they maintain a decent, professional image.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 635
As illustrated by our study, for most of the respondents the main reason for using
Facebook is related to communication. Most of them use it to communicate with their
friends, with people overseas, to stay in touch with new acquaintances and to maintain
contact with colleagues at work or on faculty groups (“I use Facebook primarily to keep
in touch with friends who have left the country or with new foreign friends that I’ve met
in various contexts. I also find it to be a good source of information”, Diana, 30).
Secondly, the interviewees use Facebook for surveillance purposes, to see what others
are doing without having to interact with them, and to get information about their dear
ones. Another main purpose consists in obtaining information, finding out about
events, being up to date with the latest news, opportunities, offers, information about
the pages they like or the public figures they follow (“I like to see the posts from
bloggers’ pages, fashion posts, I like following even the page of my favourite bakery and
find out about offers, new products, or the posts of online shops and then I get to benefit
from sales because I found out about them on Facebook.”, Camelia, 25). Other motives
for using Facebook include relaxation, entertainment, playing games, watching media
content, fighting boredom or dead time, self-promotion, keeping others updated with
their lives by sharing pictures, important events, accomplishments, being part of a
trend (“Clearly the lack of occupation is a reason. I mean when you get bored and you
have your phone at hand, you involuntarily check Facebook. And everyone is on
Facebook”, Patricia, 22). Many emphasize the power of habit when it comes to using
Facebook, the feeling of dependency it creates, which is often perceived as frustrating
(“I see all sorts of interesting posts and stay informed, but of course there are so many
times when I find myself scrolling and scrolling without actually realizing what I’m doing
or without any purpose. And it’s quite frustrating when you think about it”, Mariana, 22).
Most of the respondents find Facebook attractive for the possibility of maintaining the
connection with so many people without even having to physically interact with them,
simply by checking the updates (I love that I can be connected with everyone there. For
example, now I have over 1000 friends, but even if I had 5000 or 10.000, I could always
click on their profile or write to them. It’s so easy to communicate”, Andreea, 22). Other
mentions include the variety of opinions and media content, the ease in filling the dead
time, the free of charge messages and calls, the feeling of being a part of a trend. Many
respondents declare they are addicted to Facebook, while others state that even if they
find nothing attractive about Facebook, the feel they have no choice but to use it since
especially in grad school everyone shares information only on Facebook.
Although Facebook is perceived mainly as a relaxation tool, most of the interviewees
also use it as a mean to obtain information regarding events and ways to spend their
free time, latest news, opportunities, interesting articles, birthdays, sales and offers, or
updates on public figures. However, the respondents do not find Facebook as an
instructive or educative means. The majority of interviewees use it as a first option
when they feel bored and, thus, they find it efficient in reducing this state of spirit. Only
a few indicated no change or a worse condition, in their case the trigger being the
passive surveillance for updates and frequent checking which resulted in finding the
same data on the Facebook wall (“I got more bored using Facebook as I was scrolling
through the news feed and realized I’ve seen them all and seeing something that had
already three days made no sense, there was nothing interesting in that anymore. And
when you stay like that and just check, at some point you get angry and finally do
something else”, Diana, 30). However, most of them think Facebook helped them carry
some activities that would not have been possible otherwise such as promoting their
636 Strategica 2016
work, inviting all their friends to events with a few clicks, sharing information easily
and commenting it on faculty groups, finding information about people, recruiting,
performing questionnaire based research, finding partners for activities, getting to see
when others are active or reading their messages.
The use of Facebook for self-affirmation and online image construction
When asked about the reasons why people use Facebook, most of the interviewees
indicated the possibility of promoting their work, self-affirmation, and online image
construction. Other uses and gratifications include communication and maintaining
contact with others, being up to date, relaxation and entertainment, getting attention
and validation, acquiring a feeling of self-importance, being in trend, and finding a
partner. Addiction and social pressure are also included among reasons for Facebook
usage. The respondents believe that those who do not use Facebook are probably old
and afraid to use technology, they do not have time, they use other social networks,
they find Facebook an unsafe or fake medium, and they fear addiction, exposure or
damaging human interaction in the real world.
Most of the interviewees evaluate their profiles as having a medium or high level of
popularity. The majority of respondents use Facebook to build an image, self-affirm or
promote themselves. Even though the image construction is mostly on a personal
basis, they admit paying attention to how they are perceived in case employers or
other people might check their profiles. They focus on creating a positive and
interesting image about themselves, and the majority have completed the profiles with
previous studies or work related information as the Facebook page is perceived as a
business card (“Every time I post something I think about my image, about the message
it sends to me, especially if I’m searching for a job. Besides your CV, many employers
check your Facebook page and this is the first impression you make, after all, it’s like a
business card” Mariana, 22).
Those who used Facebook for promoting their work and attracting clients indicated
mostly positive results (“I’ve created a page for my makeup services and in one year I
got over 1500 likes without paying or anything. A lot of my clients found me on Facebook.
I also share the posts from this page on my personal account and I get positive reactions”,
Alina, 25; “I think it’s very good for businesses. For example, I worked for a club and I was
sharing the Facebook posts on my account so my friends could find out about offers, I was
inviting them to events and afterward they were tagging themselves in pics, sharing and
practically promoting the club themselves”, Lucian, 24). There are also some
respondents that do not use Facebook for promoting themselves although they intend
to or consider it very efficient. Among their reasons for not making use of it are the fear
of exposure, the fear of being judged, the fear of negative reactions, the fear of not
being good enough or having interesting things to share (“I plan to do it for a while but I
didn’t have the guts for it quite yet. I’m a shy person and sharing my music videos and
thinking I might get criticized or have negative reactions... I don’t know, I couldn’t stand
it”, Patricia, 22). Others are just not interested in creating a certain image online, using
Facebook to communicate with close friends and for surveillance purposes.
In brief, students’ responses indicate a high preoccupation for constructing a positive
online image and affirm among other users. Those who use Facebook for professional
purposes hope to create a good first impression to employers or to attract clients and
good reviews.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 637
Limitations and directions for future research
One possible limitation of the present research derives from its conceptual framework,
mainly based on classic theories of media and communication developed with regard
to traditional media outlets. Specifically, this approach is rather strict and deductive, in
the sense that it seeks to analyze the drivers of using Facebook and the main usage
patterns in the case of young people (i.e., the motives and benefits of using this social
networking site) with reference to the pre-existing yet limited number of uses and
gratifications. Future studies should try to adapt the current theoretical framework
initially designed for traditional media outlets, in order to enrich the virtually different
types of uses and gratifications associated with newer communication mediums (i.e.,
Facebook).
Another limitation is related to the conclusions about the use of Facebook as an online
image construction or self-affirmation tool. Their value cannot be neglected;
nevertheless, we need to assume the fact that all of them are based on self-reported
issues. In this sense, some conclusions might be somewhat biased (i.e., they might
follow the principles of social desirability). Therefore, future research studies could
use mixed techniques (i.e., interviews and content analysis) in order to find out how
people effectively build their online image and how they affirm themselves in the
online environment.
Conclusion
Main findings show that Romanian graduate students use Facebook mostly for
communication, surveillance, and entertaining purposes. In terms of gratifications, the
results are in line with the previous work on traditional mass media, indicating that
although it is a different medium, Facebook can satisfy people’s cognitive needs by
offering easy access to information, as well as their affective and social integrative
needs by providing emotional and pleasurable experiences, strengthening their
contact with friends, families and other persons. It can also respond to tension release
and personal integrative needs by consolidating their status and image both in the
virtual and the real world.
Furthermore, considering the uses of Facebook, the present results are consistent with
previous studies, showing that graduates use this social network for
maintaining/creating relationships and communicating, using and sharing media
content, learning about social events, impression management, and self-affirmation.
People also declare using the surveillance and the social searching functions of
Facebook. Another function is the achievement one, by outranking or competing with
others through creating a positive online image and at the same time, obtaining the
acceptance and approval of others. The majority of respondents use Facebook to build
an image, self-affirm or promote themselves either for personal or business purposes
and indicate mostly positive results.
Overall, social networking users can fulfill gratifications related to identity, positioning,
and self-other relationships when compared to traditional media, but get to benefit
from classic uses and gratifications as well. The research results are important for
determining new uses and gratifications of Facebook among graduates, with a focus on
online image construction and self-promotion techniques.
638 Strategica 2016
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Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 641
EMERGING ECONOMY CONSUMER PERCEPTION: A SOCIAL CAPITAL
EXPLANATION
Daniel GLASER-SEGURA
Texas A&M University-San Antonio
One University Way, San Antonio, TX 78224, USA
dglaser@tamusa.edu
Kathleen WELSH VOGES
Texas A&M University-San Antonio
One University Way, San Antonio, TX 78224, USA
kvoges@tamusa.edu
Pablo J. CALAFIORE
Texas A&M University-San Antonio
One University Way, San Antonio, TX 78224, USA
pablo.calafiore@tamusa.edu
Omkumar KRISHNAN
Indian Institute of Management Kozhikode
Kozhikode, Kunnamangalam, 673570 Kerala, India
omkumar@iimk.ac.in
Irina-Iulia SALANȚĂ
Babes-Bolyai University
58-60 Teodor Mihali Street, 400951 Cluj-Napoca, Romania
irina.salanta@econ.ubbcluj.ro
Laurențiu Dan ANGHEL
Bucharest University of Economic Studies
41 Dacia Blvd., 010404 Bucharest, Romania
laurentiu.anghel@ase.ro
Abstract. The perception of product quality is an important means for consumers to
make purchasing decisions based on intangible criteria, particularly when they do not
have access to decisional factors available to manufacturers and supply chain members.
Consumer decisions in emerging economies are further biased by perceptions regarding
the intentions these manufacturers and distributors. Members of emerging economies
distrust other societal members to a larger degree than found in developed countries.
Distrust of other societal members is an indicator of low social capital. Social capital is
considered as the accrual of trust at a social level, has no tangible value, but it generates
productive activities. Social capital enables economic transactions that are impossible in
its absence. In the inverse, low social capital societies do not accrue much trust and
productive activities are not constrained by it its relative absence. In our paper we
propose a social capital explanation of emerging economy consumer perception toward
product quality. We will use a social capital framework developed by Nahapiet and
Ghoshal (1998) based on: 1) cognitive capital, 2) structural capital, and 3) relational
642 Strategica 2016
capital. We will also provide propositions that consider the following ideas. Consumers in
emerging economies perceive that products made specifically for their country are low
quality and these low-quality goods enter their markets from domestic and foreign
manufacturers. Consumers in emerging economies perceive that high-quality products
made in their country are exported to developed countries and lower quality products
stay in the country for domestic consumption. Consumers in emerging economies perceive
that domestic manufacturers mislead them by using foreign sounding product names and
false statements on labels. They also prefer products made for developed countries. When
making purchase decisions, they rely on family and friends for information. Consumers
from emerging economies do not trust that manufacturer or their representatives will be
honor product warranties and, by extension, they do not trust their government to
protect their interests. We also will discuss why a similar concept, country of origin effect,
does not address the emerging economy consumer perception deliberated in our paper.
This paper contributes to the field of operations and supply chain management by
focusing on perceptions of product quality in emerging economies using a social capital
explanation and by developing a framework of eight propositions meant to explain in
more depth certain particularities.
Keywords: social capital; emerging economy; consumer; perception; quality.
Introduction
The perception of product quality in emerging economies is often that of poor quality.
The consumers in these countries frequently feel that the products made for
consumption in their countries are inferior to those of the developed countries
(LeBarre, 1994) and there is a distinct preference for foreign global brands over local
products (Atsmon, Child, Dobbs & Narasimhan., 2012; Guo, 2013; Zhang, 2015).
Clearly, there is a sense that citizens of other countries, particularly those in the
developed world, are receiving better quality products.
While the developed countries do enjoy quality goods, it was not always the case, at
least not in the US. In the 1980s a resurgent focus on product quality evolved to
counter a decline that began after the end of WWII. One important cornerstone of the
new quality movement involved creating a more comprehensive definition of product
quality. Garvin’s (1987), broad definition of quality in which he listed eight major
classifications for product quality was an example of this movement. His classification
listed: 1) performance; 2) features; 3) reliability; 4) conformance to specifications; 5)
durability; 6) serviceability; 7) aesthetics; and 8) perception of quality as a new
approach to assessing quality. His classification was an advance when compared to the
prior narrow definition of quality that served as a hygiene approach to quality
problems from the manufacturer’s point of view. Garvin’s (1987) last classification, the
perception of quality, was important because it was one of the new dimensions that
brought the voice of the consumer into the quality discussion. Perception of quality is
based on indirect measures, in which consumers make their purchasing decisions
based on reputation and intangible criteria, as they are constrained by their lack of
knowledge to infer conformance to specifications, durability, reliability and other
product quality traits. Sparks and Legault (1993) further defined product quality as a
multistep process based largely on Garvin’s (1987) quality classifications. In their
definition, the various steps were undergirded by perceived quality. Similarly, Reeves
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 643
and Bednar (1994) also provided a multidimensional definition and listed four quality
factors. One of these, meeting or exceeding expectations, was listed as a perceptual
measure based on the consumer’s perspective. Hansen (2001) also used multiple
components to define quality along with a continuum ranging from the consumer’s
perspective to the producer’s perspective. The consumer’s perspective of quality was
characterized by a deficiency of objective criteria. This study defines the perception of
product quality as the subjective interpretations of indirect measures used by
consumers and these are formed or influenced by the consumer’s personal experience.
However, there is also a perception among some emerging economy consumers that
products sold by foreign producers and home country manufacturers are deliberately
made low-quality products. For example, cheap, low quality, hazardous Mattel toys
rejected for sale in the US were sold in China and these toys were a reflection of a US
manufacturer sending shoddy quality products to an emerging economy, which was
not Mattel’s intention (Canaves, Spencer & Casey, 2008). Food products from China
and other emerging economies containing carcinogens, pollutants, microbes, and other
hazardous elements were also rejected by US inspectors and these were resold in
emerging economies still under a US label creating uncertainty about the quality
coming from foreign manufacturers (Roth, Tsay, Pullman & Gray, 2008). The
combination of selling poor quality products alongside good quality from both
domestic and international producers creates distrust among emerging economy
consumers.
The perception by emerging economy consumers of purposefully low-quality products
made for their country by international and domestic producers could have been
attributed to the country of origin (COO) effect. The country of origin effect is a highly
researched theory that declares that consumers base their intention to buy or reject
products based on the reputation of the COO. The COO effect construct, however,
suffers from a case of viewpoint. That is, most COO research is conducted in developed
countries and focuses on products made in emerging economies while scant research
is conducted from the perspective of an emerging economy (Bayraktar, 2015). In
addition to a problem of viewpoint in using COO in the context of consumers of
emerging economies, the COO effect is not based on any causal relationship for the
perception. That is, the COO effect provides no antecedent explanation of what causes
the poor perception of products made in the emerging economies beyond prior
experience. Due to limitations of perspective and no explanation of intention, the COO
effect is an ineffective tool to understand the emerging economy consumer perception
of product quality. What is needed is a framework that takes the perspective of the
emerging economy consumer that incorporates an explanation of why or how
members of these countries feel that quality is purposively low.
The emerging economy consumer perception (EECP) is a framework introduced here
that attempts to explain why consumers sense that low product quality is intentional.
The EECP of low quality is defined here in terms of social capital and is a social level
structure (Tsai & Ghoshal, 1998) that facilitates the understanding of perceptions of
consumers in emerging economies. Social capital is regarded as the accrual of trust at a
social level (Dasgupta, 1988) has no tangible value, but it generates productive
activities (Coleman, 1990). Social capital covers many aspects of social life including
relationships, trust and cooperation (Tsai & Ghoshal, 1998). It enables economic
transactions that are impossible in its absence. In the inverse, low social capital
644 Strategica 2016
societies do not accrue much trust and productive activities are constrained by its
relative inadequacy.
Consumers in emerging economies tend to distrust other societal members
(Fukuyama, 1995) and this distrust is an indicator of low social capital. EECP is
characterized as social level distrust of the intentions of manufacturers, domestic and
international, to produce, distribute, and sell inferior quality products within the
domestic supply chain. Social capital has been used at various theoretical levels,
including at the social level as a social good (Putnam, 1993) and also as a cautionary
explanation of low social capital among a society’s members (Fukuyama, 1995). Social
capital frameworks have also been used to study interfirm relationships (Baker, 1990),
innovation (an element of improving product quality) between firms (Smart, Bessant &
Gupta, 2007), reducing opportunistic behavior among supply chain members (Adler &
Kwon, 2002), improvement of product quality through supplier development activities
between buyers and suppliers (Krause, Handfield & Tyler, 2007), among others. There
is a dearth of research, however, using a social capital framework to explain the
perception of product quality among consumers in emerging economies. Most often,
the research in the field is used to confirm what is currently known than to develop a
new theory. In addition, the research in this field promotes the positive aspect of social
capital (Matthews & Marzec, 2012). The opposing view of the difficulties encountered
in societies possessing low social capital, as found in emerging economies (Benson
2001), has not been researched to a significant degree and deserves consideration
(Matthews & Marzec, 2012). This study has a twofold aim, which is to study social
capital in the perception of quality, an operations, and supply chain topic, and to do so
in an emerging economy setting. In the ensuing sections, we will introduce a definition
of social capital as expressed by Nahapiet and Ghoshal (1998). This definition will be
followed by a discussion of the framework of Emerging Economy Consumer Perception
model founded through eight propositions.
Social capital
The study of social capital has evolved over the years and has been used in numerous
fields of study. It is considered a stable model (Kwon & Adler, 2014). Social capital was
first introduced in the mid-1960s to frame relationships and trust among individuals,
that is, social members leading to collective and cooperative work (Jacobs, 1965). Most
recently, the field of operations and supply management has used the social capital
framework in a number of studies that have covered continuous improvement, project
management, new product development supply chain, and quality management
(Matthews & Marzec, 2012).
Social capital has also transformed beyond a study of relationships to include
underlying norms and the structure of the social networks or systems. Nahapiet and
Ghoshal (1998) introduced these additional elements in a three-part model that
incorporated social capital’s principal dimensions to explain trust-forming behaviors
and accrued relationships among social groups: 1) cognitive, 2) structural, and 3)
relational dimensions. They defined social capital as, “the sum of the actual and
potential resources embedded within, available through, and derived from the
network of relationships possessed by an individual or social unit (Nahapiet &
Ghoshal, 1998, p.243). Cognitive capital expedites shared comprehension through
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 645
common norms and language. The structural dimension consists of the network of
group member relationships and is defined by the potency of the intragroup links.
Finally, the relational dimension reflects the theoretical underpinnings of trust among
group members. These three principal interrelated elements are described in more
detail in this section and related to EECP.
Cognitive Social Capital. Cognitive social capital is considered as the primary source of
social capital (Kwon & Adler, 2014). These norms are considered shared ‘code,’
‘paradigms’ and signs of a ‘collectivity’ (Tsai & Ghoshal, 1998). Cognitive social capital
refers to the social group consciousness and is based on cultural embeddedness and
norms. Embeddedness refers to a course of action that often runs independently and,
possibly, in opposition to the economic determination found in cost and benefit
analysis, as used in neoclassical economics (Putnam, 1993). Collective norms create a
‘we-feeling’ of social identity. These norms are often recorded in the groups by past
members who no longer reside there and continue as to exert influence on group
membership. These ties add a historical dimension to cognitive capita (Kilduff, Tsai &
Hanke, 2006).
In an emerging economy, individuals tend to identify with other in-group members
and are suspicious of the intent of outgroups. An in-group is defined as a network of
individuals who share similar norms (Triandis, 1994; Turner, 1982). Further, in
emerging economies, norms are strong are among consumers in the group but are
weak between consumers and the companies that provide them products. These weak
links are indicative of distrust. That is, cognitive social capital is not aligned for
perceptions of positive outcomes in economic transactions, rather, they are defensive
and constrain social capital and efficient transactions (Benson, 2001).
Structural Capital. Structural capital characterizes the system of relationships
(Nahapiet & Ghosahal, 1998) and is a secondary source of social capital (Mouw, 2006).
Tsai and Ghoshal (1998) include social interactions as part of this source of social
capital. Structural capital is based on membership in in-groups. The structure of
emerging economy in-groups is generally by ascription, such as familial, tribal, and
racial ties. Out-groups are assemblies of individuals to which a person does not belong,
in this case, they may be seen as national and foreign companies. Further, out-groups
may compete for resources or supremacy of ideology with an individual’s in-group
(Turner, 1982). That is, the social structure in emerging economies creates an “us-
versus-them” mentality, particularly when distrust has been engendered between the
consumer in-groups and the manufacturers who supply them. In our framework,
structural capital refers to the emerging economy consumers and the supply chain
members who provide products.
Adler (2014) stated that in addition to a conceptual understanding of structure,
physical space determines structural capital. In this sense, the location and proximity
of in-group members establish the in-group’s boundaries. The consumer in an
emerging economy knows the general location and conditions of life of fellow in-group
members but may vaguely know the location and condition of the national
manufacturer’s place of business and, even more remotely, know about the foreign
manufacturer. In addition, much of the work of social capital has emphasized
‘horizontal’ or peer relationships. Little has been discussed in extant research about
the inequality from ‘vertical’ or asymmetrical power relationships. The structure of
646 Strategica 2016
developed and domestic firms delivering products, some of them low quality,
hazardous or defective, is a powerful narrative to separate them from the consumers
in emerging economies (Kwon & Adler, 2014). Finally, in the context of emerging
economies, social structure aggregates at the national level (Xiao & Tsui 2007).
Relational Capital. Relational capital refers to the nature of the relationships among
members in the system (Nahapiet & Ghosahal, 1998). Among the emerging economy
consumers, these relationships would be understood as communal links to other in-
group members who behave and share like-minded buttress the actions and norms of
fellow members (Kwon & Adler, 2014; Vaisey & Lizardo, 2010). Moody (2001) uses the
term ‘homophily’ to refer to the attraction of like-minded people who share the same
values as well as other criteria such as ethnicity and race. In this sense, consumers in
emerging economies see their group consisting of similar consumer peers.
Nahapiet and Ghoshal (1998) also define relational capital as the assets created
through the relationships. Under conditions of high social capital, these assets would
be considered as the perceived quality of products and degree of goodwill between
consumers and the manufacturers. These assets are can also include trust and
trustworthiness (Tsai & Ghoshal, 1998). In an emerging economy, however, the
relational assets between the consumers and product providers is not as found as
found in developed countries. Emerging economy consumers’ relationships with the
supply chain members who provide products, would not be considered in positive
social capital terms of respect and friendship. On the contrary, these relationships
would be seen as low-trust.
Despite the usefulness of deconstructing the social capital framework, the boundaries
between the three dimensions overlap (Nahapiet & Ghoshal, 1998; Rajennd, Muniady,
Al Mamun, Mohamad, Permarupan & Zainol, 2015). Tsai and Ghoshal (1998) found
that the three dimensions while being distinctive, do interact with each other to
explain transaction ease and value creation.
Propositions
Social capital in emerging economies is low when compared to that of developed
countries. The effects of low social capital are evident in their perceptions of quality
provided to them by developed and domestic supply chain members. In this section,
we will provide propositions regarding the way that low social capital affects the
perceptions of quality in emerging economies.
Emerging economy consumers generally have a negative history of dealing with firms
from developed countries who have subjected their countries to opportunistic
treatment based on asymmetric market power. In times of economic crises, developed
country firms, and bankers, through the IMF, often negotiate austere debt repayment
schedules and buy domestic firms at below market value (Robertson, 2016). The field
of economics in Latin American countries is strongly influenced by dependency theory
wherein basic resources flow from emerging countries to developed countries at low
cost and the developed countries hold back financial, technological, and managerial
know-how, at the expense of the emerging economies (Grosfoguel, 2000). The
perception of emerging economy consumers regarding foreign firms is often tainted by
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 647
distrust of intentions. If a product is made specifically for an emerging economy, then
the product must be low quality and is not what a consumer in a developed country
would use. Pitlik and Kouba (2015, p.355) stated, “people who do not trust unknown
others also tend to mistrust government and private companies”.
Proposition 1: Consumers in emerging economies perceive that products made
specifically for their country are low quality.
Proposition 2: Consumers in emerging economies perceive that low-quality goods
enter their markets from domestic and foreign manufacturers.
Emerging economy consumers are now part of the global supply chain and they know
that many products are manufactured in their countries for export to the developed
countries. When they shop domestically, however, they perceive that the better
products made in their countries are exported and the ‘seconds’ and low-quality goods
are left for domestic consumption. A high percentage of products in China are inferior
or contaminated (Banham, 2007) or black market counterfeits (Canaves et al., 2008).
Some of the domestic companies that produce low-quality products are also corrupt in
their dealings with the government. Firms that provide high-quality products,
however, tend to export their products to a higher degree and are less apt to engage in
corrupt practices. The emerging economy consumer has difficulty knowing the
difference between a licensed quality product and a low-quality counterfeit. They often
assume that the counterfeit stays in the country and the high-quality product is
exported (Luo & Han, 2009).
Proposition 3: Consumers in emerging economies perceive that high-quality products
made in their country are exported to developed countries and lower quality products
stay in the country for domestic consumption.
Deceiving emerging economy consumers is a common practice among domestic
manufacturers. These manufacturers use a variety of means to pretend to be foreign
products. For example they may state that the manufactured goods are ‘Export
Quality,’ when they are not intended for export, or give the product a foreign sounding
name, usually in English (Zhang, 2015). Product name origin is largely associated with
the language on the packaging (Samiee, Shimp & Sharma, 2005). For example, a
Hungarian food chain named its bakeries “Fornetti,” an Italian sounding name for the
Romanian market. Romanians value Italian products more than they do Hungarian
goods. The intent of the bakery chain was to mislead the consumer who would not buy
the Hungarian product.
As consumers of a globalized market, emerging economy consumers also prefer luxury
items and consumer items from developed countries over products made in their own
countries (Hamzaoui & Merunka, 2006). Qian, Gong, and Chen, (2014) found that some
counterfeiters in China mix fake and authentic products to trick consumers. The
counterfeiters adopt similar product quality traits as found on authentic products, such
as stitching, logo, and appearance, but the consumer is unable to determine other
quality aspects that comprise long term durability and functionality.
648 Strategica 2016
Proposition 4: Consumers in emerging economies perceive that domestic
manufacturers mislead them by using foreign sounding product names and false
statements on labels.
Notwithstanding that, consumers in emerging economies generally distrust the
intentions of foreign firms and governments to send low-quality products specifically
to their market, they do prefer global over local products, particularly if they have had
exposure to the benefits of the global product (Guo, 2013). With the advent of
accessible print media and later with online media, consumers in emerging economies
know global products and seek these out over the local brand due in part to social
consciousness and style (Yang, Zhang, Wang & Liu, 2004). Consumers in emerging
economies are also aware of the difference in quality between the developed country
product and the local version (Wang & Yang, 2008). What has emerged is an emerging
economy consumer who is concerned about the country of design is an important trait
when picking high-end products. In a survey of product attractiveness, Chinese
consumers preferred products from developed countries that are high quality and are
made with or include higher technology than is available in the emerging economy
(Atsmon et al., 2012). In addition, emerging economy consumers will often include
shopping excursions to developed countries to buy the items they are not sure are
authentic products in their own countries and are also available at lower cost.
Proposition 5: Consumers in emerging economies prefer products made for developed
countries.
The distrust of product manufacturers and suppliers by consumers in emerging
economies is manifest when consumers need specific product quality information.
They do not generally seek out print or online information when making product
purchase decisions. Atsmon et al. (2012) found that Chinese and Egyptian consumers
relied on family and friends for advice on buying goods to a greater degree than in the
US and Great Britain. Doh (2014) found that when lay people were deficient in
understanding technical and or complex decisions, they relied on people they trusted
for advice. Faqih (2016) suggested that firms should work with family members and
friends when products are new and unknown. Bronfman and Lopez-Vazquez (2011)
found in a study of trust and acceptance of risk that Latin American consumers turn to
family members and friends for advice.
Proposition 6: Consumers in emerging economies rely on family and friends for
information to make purchase decisions.
When a product is defective and does not live up to the stated company warranty or its
use is found to be hazardous to the consumer or hurt some other domestic
stakeholder, the emerging economy consumer does not believe that the manufacturer
or their representatives will live up to its obligation to ‘make things right.’ Nor do they
believe that their government will follow up to correct problems or anticipate them
through preventive quality and risk audits. In a report of distrust of government
institutions in emerging and developed countries, Pitlik and Kouba (2015) found that
individuals, under conditions of distrust, support government involvement in
consumer affairs if there is less trust in private firms than in government institutions.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 649
According to Doh (2014, p.105), researchers of the social capital theory have found
that “countries that have high levels of social capital exhibit a higher quality of
government”. In the inverse that would mean that low social capital countries also
have deficient weak institutions in their countries. The principal finding of Bronfman
et al. (2009) in a study of social trust of government institutions in Mexico was that
public trust of government institutions determines the public’s approval of
government intervention on to protect the public. In the inverse, the low trust of the
government leads to low trust in the government’s ability to help consumers with low-
quality products. Chinese consumers have little support from the Chinese government
in terms of enforcing stricter product quality guidelines (Banham, 2007; Qian et al.,
2015).
Proposition 7: Consumers from emerging economies do not trust that manufacturer or
their representatives will be honor product warranties.
Proposition 8: Consumers from emerging economies do not trust their government to
protect their interests.
Conclusions and implications
Customer decisions in any economy are a leading factor in the success or failure of a
business. The common perception regarding product quality in emerging economies is
crucial for any business. The perception of product quality is rooted in the social fabric.
Because of its limitations, we cannot use the country of origin effect to explain the
perspective of the emerging economy consumer. Consequently, we rely on a
framework based on social capital theory. Since social capital covers aspects of the
relationship, trust and cooperation, it facilitates economic transactions. Despite its
complex application, the social capital framework as found in emerging economies has
not been yet researched to an extensive degree and is a starting point for future
studies. The theoretical implications of our study arise from the desire to bridge this
gap of knowledge.
The practical implications of our study include the fact that consumers’ decisions in
emerging economies are biased by their perceptions regarding the quality of the
foreign and domestic products sold in their market. The eight set of propositions
reflecting the perceptions of consumers are relevant to managers in understanding
certain particularities of the emerging economies. Knowing that consumers in
emerging markets suspect that lower quality products are designed for them,
managers can find better ways to market certain products in ways to address this
belief. Furthermore, managers can use the set of eight propositions to develop
strategies that encourage the domestic consumption and decrease shopping tourism.
The limitations of our study include the fact that our framework of eight propositions
has not been tested in the emerging economies.
650 Strategica 2016
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Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 653
PERFORMANCE MEASUREMENT AND INTELLECTUAL CAPITAL:
MAIN FRAMEWORKS AND RESEARCH AGENDA
Raúl RODRÍGUEZ-RODRÍGUEZ
Universitat Politecnica de Valencia
Camino de Vera, Valencia, Spain
raurodro@cigip.upv.es
Juan-José ALFARO-SAIZ
Universitat Politecnica de Valencia
Camino de Vera, Valencia, Spain
jalfaro@cigip.upv.es
María-José VERDECHO
Universitat Politecnica de Valencia
Camino de Vera, Valencia, Spain
mverdecho@omp.upv.es
Ramona-Diana LEON
National University of Political Studies and Public Administration
30A Expozitiei Bvd., Sector 1, 012104, Bucharest, Romania
ramona.leon@facultateademanagement.ro
Abstract. It is widely accepted the importance that intellectual capital possesses
regarding organisational assets. Intangible assets are difficult to quantify, at last from an
objective perspective so is the link between investment/possession of these assets and
organisational performance. This states a big problem that makes that many
organisations do not invest as many resources as they should in order to acquire the
intangible assets that would make them become more competitive. Therefore, this
research highlights the main works that cover this topic offering some solutions to
overcome this problem by linking and even integrating intangible assets into a
performance measurement system in order to provide a basis for decision-makers.
Additionally, a research agenda is stated where the main points that could be followed,
from a research point of view, in the next years are highlighted.
Keywords: intellectual capital; performance measurement; organizational assets.
Introduction
A company’s capability to create value depends on its ability to implement strategies
that respond to market opportunities by exploiting their internal resources and
capabilities (Penrose, 1959). Therefore, managers need to understand what the key
internal resources and drivers of performance in their organisations are. Traditionally,
those resources were physical, such as machines and equipment, and financial capital.
In today’s economy traditional tangible assets seem to become increasingly transient
and rarely provide a long-term competitive advantage. This reflects the belief that
intangibles assets are a fundamental resource for corporate growth and organizations
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need to put into work procedures for managing their intangible assets. In the last
years, the concept of Intellectual Capital (IC) has emerged as a key to analyse and
evaluate the intangible assets of organizations.
This paper is organized as follows. First, in the next point, it presents the main IC
definition and management models. Then, it highlights the main advantages of
measuring IC in organizations, pointing out the main lacks of the current existing
performance measurement systems in this ambit. Based on these gaps, the paper
presents then an approach to integrate IC within a PMS. Finally, the main conclusions
are stated as well as future research work in form of a research agenda.
Literature review
In the last decades, several models have been developed for managing the IC. All of
them attempt to identify, classify, measure and manage the company’s IC. Some models
are focused on the global IC of the company such as the Skandia Navigator (Edvinsson
& Malone, 1996), the Intangible Assets Monitor (Sveiby, 1996), the Intellect Model
(Euroforum, 1998). On the other hand, other frameworks are focused on the
intangibles related to the defined strategies such as the MERITUM Guidelines (2002)
or the Intellectual Capital Management System (Viedma, 2001). However, none of
these models implement or suggest the integration within a performance
measurement system, which would contribute the advantages of its use.
Table 1. Main definitions of Intellectual Capital
References Definition
Hall (1992) It is set up by intangible property and intangible resources.
Edvinsson and Sullivan It is the knowledge that can be converted into value.
(1996)
Brooking (1996) It is the result of four main components, which are the
market assets, human-centred assets, intellectual property
assets and infrastructure assets.
Sveiby (1997) It is related to three categories of intangible assets: internal
structure, external structure, and human competence.
Roos, Roos, Dragonetti It is composed of (and generated by) a thinking part, i.e. the
and Edvinsson (1997) human capital, and a non-thinking part, i.e. the structural
capital.
Stewart (1997) It is an intellectual material that has been formalized,
captured and leveraged to produce a higher-valued asset.
Edvinsson and Malone It is the sum of human and structural capital. In more detail, it
(1997a) involves applied experience, organizational technology,
customer relationships and professional skills that provide
an organization with a competitive advantage in the market.
Bontis, Dragonetti, It is a concept under which are classified all organization
Jacobsen and Roos (1999) intangible resources as well their interconnections
In the literature, the concept of IC has been defined from different management
perspectives (Marr, 2005; Marr & Chatzkel, 2004) as shown in Table 2. For instance,
accounts prefer to talk about intangibles and according to IASB (2004), define them as
“non-financial fixed assets that do not have physical substance but are identifiable and
controlled by the entity through custody and legal rights”. From a human resource
(HR) perspective, IC refers to skills, knowledge, and attitudes of employees. From a
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 655
marketing perspective, intangibles such as brand recognition and customer
satisfaction are at the heart of business success, whereas from at the information
technology (IT) perspective, intangibles are seen as being software applications and
network capabilities (for an in-depth discussion of the different perspectives on IC
please refer to Marr (2005). As shown by the above definitions, there is no agreement
on what constitutes a good or sufficient definition of IC. Finally, IC is an important
theme in different disciplines and is looked at from different perspectives such as
economics, strategic management, finance, accounting, reporting and disclosure,
human resources, and marketing and communication. However, there are few works
developed related to the IC in the field of performance measurement.
Table 2. Main perspectives of intellectual capital
Perspective Author(s)
Economics OECD (1999); Lev (2001)
Strategy Itami (1987); Hall (1989, 1992, 1993); Klein and Prusak
(1994); Edvinsson and Sullivan (1996); Brooking (1996);
Sveiby (1997); Roos et al. (1997); Roos and Roos (1997);
Stewart (1997); Edvinsson and Malone (1997b); Boisot
(1998); Teece (1998); Bontis et al. (1999); Nonaka,
Toyama and Konno (2000); Marr and Schiuma (2001);
Kaplan and Norton (2004)
Finance Lev (2001)
Accounting Lev (2001); IASB (2004)
Reporting and Disclosure Lev (2001); IASB (2004)
Human Resources Becker (1964)
Marketing and Communication Brooking (1996)
The Intellectual Capital Management Models are focused on the establishment of one
definition of IC, the components or dimensions of its structure, the intangible assets
that belong to each component or dimension, and the indicator used to measure the
identified intangible assets. Some models, as result of their activities, elaborate one
report with two proposals, one as an internal management tool and the second as an
external spreading tool of information for informing to the stakeholders about the real
value of the company and not only about its financial value. Only some of the recently
developed models of IC identify the need of linking the intangible assets with the
strategy of the company, such as the European Project MERITUM (2002). Such a
project was the first model that proposed the identification of the strategic objectives
of the company and the critical intangible assets related to each of these strategic
objectives as one of the main steps of this project. Moreover, the RICARDA project
establishes that the first step to creating a report of Intellectual Capital for Regional
Networks and Clusters is the definition of the regional network or cluster’s objectives
in medium and long term and the second step is concerning to the identification of
each intangible assets that affect them.
656 Strategica 2016
Measuring intellectual capital
Nowadays, IC has become a determinant resource for enterprise to retain and improve
competitive advantages. Because of its abstract nature, the IC is very difficult to
measure, having become a challenge for business managers to evaluate the
performance of IC effectively.
Gopika and Aulbur (2004) identified as benefits of IC measurement firstly the
identification and mapping of intangible assets, which allows the company knowing its
resources of competitive advantages in the future. Secondly, the recognition of
knowledge flow patterns within the company. The last two benefits drive to the
prioritization of critical knowledge issues, which allow the acceleration of learning
patterns within the company thanks to the best practice identification and diffusion
across the company, by presenting a strong business case for the best practice. Besides,
the measurement of the IC permits a constant monitoring of asset value as well as to
find ways of increasing the value of the company and the understanding of how
knowledge creates interrelationships and increases innovation. From the point of view
of the employees, the benefits are with regard to the increasing of collaborative
activities and a knowledge sharing culture as a result of increased awareness of the
benefits of knowledge management. Also, the employee self-perception of the
organization and their motivation are increased. Finally, it creates a performance-
oriented culture.
Measurement of IC will result in significant benefits to the organization that will help
to determine business strategy, process design as well providing a competitive
advantage.
Additionally, Bontis (2001) carried out an exhaustive literature review in which he
highlighted the following main limitations in the existing measurement systems:
- The existing approaches relate to the organization as a whole and do not account for
individual departments or knowledge workers.
- They do not balance past-orientation with future predictions, or quantitative financial
measures with qualitative perceptual and process measures.
- Behavioral dynamics and its impact on organizational economics are not measured.
- There is no system for measuring process effectiveness in capturing tacit knowledge
transfer.
At present, measuring a company’s Intellectual Capital is quite common. According to
Nordic survey, two-thirds of Finnish companies measure their Intellectual Capital
regularly. Despite the fact that measuring Intellectual Capital is considered important,
only 35 percent of the companies know how Intellectual Capital should be measured
and reported (Nordika Project, 2002). Although different measurement systems for
measuring Intellectual Capital have been developed, none of them has been accepted
for common use. According to Sveiby (2001) the approaches for measuring intellectual
capital fall into four categories: Direct Intellectual Capital Methods (DIC), Market
Capitalization Methods (MCM), Return on Assets Methods (ROA) and Scorecard
Methods (SC). These methods offer different advantages and disadvantages.
Scorecard Methods, in particular, have been developed as a tool for management and
although all the scorecard methods have many similarities, they can be categorized
into two different types: the (traditional) balanced performance measurement
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 657
methods and Intellectual Capital measurement methods. The balanced performance
measurement frameworks, e.g. the Balanced Scorecard (Kaplan & Norton, 1992) and
the Performance Pyramid (Lynch & Cross, 1991), have been developed for measuring
and managing an organization’s performance from several perspectives. IC is often
related to one or more of these perspectives. However, in the IC measurement
methods, e.g. the Skandia Navigator (Edvinsson & Malone, 1997) and the Intangible
Assets Monitor (Sveiby 1997), the main rationale is the measurement of IC. Financial
and other physical assets are not paid as much attention as the Intellectual-Capital-
related factors.
Kaplan and Norton (2004) indicated that the intangible assets are hard for competitors
to imitate, which makes them a powerful source of sustainable competitive advantage.
The Learning and Growth Perspective of the Balances Scorecard have long been
considered its weakest link and Kaplan and Norton (2004) admitted it (see their
response to “Letter to the Editor”). To improve this the authors included in this
perspective the intangibles assets essentials for implementing any strategy, which are
classified in three categories: Human Capital (the skills, talent and knowledge that a
company’s employees possess), Information Capital (the company’s database,
information systems, networks and technology infrastructure) and Organizational
Capital (the company’s culture, its leadership, how aligned its people are with its
strategic goals and employee’s ability to share knowledge). Additionally, and to link
these intangible assets to the company’s strategy and performance, these authors
developed a tool called “strategic map”.
Bernard and Adams (2004) indicated that there are almost no references at all in
Kaplan and Norton’s recent work to the practitioner or academic research already
carried out on the topic of intangible assets. And, although the terminology used to
describe and categorize intangible assets is far from being cohesive at the detailed
level, there has recently been a general convergence towards a three-pronged
framework consisting of Human Capital, Organizational (or Structural) Capital and
Relational Capital (Meritum Guidelines, 2002). Therefore, it is not clear why
Information Capital is considered by Kaplan and Norton (2004) separated from
Organizational Capital as most of the research in this field agree.
Also, in the definition of Informational Capital is included the company’s strategic IT
portfolio of infrastructure and applications, where infrastructure comprises hardware
such as central servers and communication networks, which are in fact tangible assets
infrastructure assets and should not be categorized as intangible assets
As well, the concept of Relational Capital is completely missing from Kaplan and
Norton’s (2004) definition of intangible assets. The Balanced Scorecard includes a
Customer Perspective and it could be argued that customer relationships could be
included into this perspective. In fact, Kaplan and Norton (2000) argue that this
perspective should contain the customer value proposition. Even if relationships might
be included the issue remains that according to Kaplan and Norton’s (2000) definition
of intangibles assets, Relational Capital is not included, which defies the views of most
researchers working in this field.
At this point, several gaps have been identified in the above literature review such as
the lack of consensus among the researchers and the practitioners about the
658 Strategica 2016
definitions of IC, the IC components, and the IC indicators. Many and various have been
the attempts to measure the intangible assets of the companies through different IC
models. Kaplan and Norton (2000), instead of creating a new model to measure the
intangible assets, have integrated the measurement of the intangible assets within
their Balanced Scorecard. Several researchers have criticized this attempt, having
being identified several gaps in the way they have done such a merge.
Intellectual capital and performance measurement systems
It is important to design a robust PMS to gauge the performance of the enterprise’s IC
(intangible assets). The basic purpose of any measurement system is to provide
feedback, related to the organisation’s goals, which increases the chances of achieving
these goals efficiently. Measurement gains true value when used as the basis for timely
decisions. Another purpose of measuring is not to know how your business is
performing but to enable it to perform better. The ultimate aim of implementing a PMS
is to improve the performance of your organization. If you can get your performance
measurement right, the data you generate will tell you where you are, how you are
doing, and where you are going.
In this sense, the work developed by Boj Viudez, Rodríguez-Rodríguez and Alfaro-Saiz
(2014) presents a methodology to link intangible assets and organizational
performance (measured by a Balanced Scorecard). This approach integrates the
intangible assets into a PMS instead of doing the opposite, to integrate a PMS into an IC
management model. This is because the IC management models are usually focused
only on intangibles assets, taking into account neither the tangible assets nor the
relationship among the intangible and the tangible assets nor how the intangible assets
create value into the company through the tangibles assets. As Kaplan and Norton
(2004) stated unlike, tangible assets, intangible assets almost never create value by
themselves. They need to be combined with other assets. This fact is neither considers
by the IC management model nor by any PMS. The present proposal takes this fact into
account.
One of the main advantages of incorporating an IC management model within a PMS is
the integration in a structured manner of the total assets - tangible and intangible - of
an organization. In the current context of competitiveness, it is necessary to measure
the performance of such intangible assets in order to obtain the highest benefits and
associated competitive advantages.
This proposal is based on the work developed by Alfaro, Ortíz and Poler (2007) called
PMS IE-GIP. Then, this PMS is the performance measurement system in which the
proposed IC model is integrated. PMS IE-GIP adopts the classic Kaplan and Norton’s
(1992) balanced scorecard approach and enriching it by introducing, among others,
some strategies associated to each of the defined objectives. These strategies are ways
of action that will support the consecution of the objective they are linked to.
Hence, the methodology analyzes how the different intangible assets influence in the
achievement of the strategies defined as critical. Then, it proposes the usage of the
multi-criteria decision aid method ANP (Saaty, 1996), to support the complex decision-
making process concerning with the election of the intangible assets linked to each
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 659
strategy as well as the election of the indicators used to measure them. This
methodology has been only applied to a service organization (research center), which
means that it should be further applied to another type of organizations.
Conclusions and research agenda
This paper has reviewed the main definitions and management models of intellectual
capital focusing on the measurement of the intangible assets. It has identified several
gaps such as the lack of agreement on the indicators to be used to measure intangible
assets. Moreover, the few attempts to integrate the intangible assets within a
performance measurement system such as the classically balanced scorecard - which
reduces its action to the learning and growth perspective - are not sufficient to reflect
the complexity inherent in an organisation’s intangible assets. Only one work has been
identified as suitable to allocate the intangible assets that influence on the achievement
of the elements of a PMS.
As a research agenda, the next topics could be taken into account:
- Work on the definitions of IC, its components, and the IC indicators. Reaching
consensus on these issues is of key importance.
- Use new quantitative techniques further ANP. These techniques could be Fuzzy,
multivariate statistical techniques (if historical data is available), etc.
- Application of Boj et al. (2014) methodology to another type of organizations
(Service, product/service).
- Development of new proposals that cover and show the links between the intellectual
capital and organizational performance, incorporating the intellectual capital into a
PMS.
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662 Strategica 2016
THE NEXUS BETWEEN KNOWLEDGE MANAGEMENT AND
INNOVATION. A LITERATURE REVIEW
Ramona-Diana LEON
National University of Political Studies and Public Administration
30A Expozitiei, Sector 1, 012104, Bucharest, Romania
ramona.leon@facultateademanagement.ro
Ettore BOLISANI
University of Padova
3 San Nicola, 36100 Vicenza, Italy
ettore.bolisani@unipd.it
Abstract. Knowledge management is the new managerial discipline whose aim is to
support the processes of knowledge exploitation, memorization, re-use and learning.
Therefore, it can be said that knowledge management has, implicitly or explicitly, a
strong relationship with innovation management. Despite this fact, knowledge
management and innovation management have developed into two separate fields and
two distinct contexts of research. Starting from these assumptions, the purpose of this
paper is to examine how the connection between knowledge management (KM) and
innovation management has been developed in the last 10 years. In order to achieve our
goal, an etic approach is employed which encompasses an external view of meaning
associations and real-world events. The research combines the qualitative with the
quantitative perspective and the whole multi-stage process is dominated by an inductive
approach. The analysis focuses on 894 articles that were published in knowledge
management and innovation journals, mostly indexed in Scopus and Thomson Reuters
databases, during 2006 – 2016. The main results prove that there is a strong connection
between KM and innovation management although the number of KM journals that
approach topics related to innovation is higher than the number of innovation journals
that focus on knowledge-related issues. The concept of “innovation” is by far the most
used in the analyzed KM papers, while the term of “knowledge” is frequently used as a
generic keyword in the Innovation papers; only a few papers are about a specific topic
such as product development, project management, and process improvement – in the
case of KM journals – or organizational learning, social capital, and human capital – in
the case of Innovation journals. The research findings have both theoretical and practical
implications. On the one hand, it synthesizes how the link between knowledge
management and innovation management evolved in the last 10 years. On the other
hand, it may serve as a handbook of managerial guidelines; it brings forward the
knowledge management approaches and tools which can be used for product or process
innovations.
Keywords: knowledge; knowledge management; innovation; product development;
intellectual capital.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 663
Introduction
Knowledge is considered to be an essential ingredient of economic activity, especially
in terms of firm’s capability to develop and exploit new ideas for future
competitiveness while innovation is described as one of the main drivers of firm’s
productivity, profitability and competitiveness. Therefore, the nexus between
knowledge and innovation has long been underlined in the literature and innovation is
usually presented as an output of knowledge exploitation and integration (Amara,
D'Este, Landry & Doloreux, 2016; Kogut & Zander, 1992; Leiponen & Helfat, 2010;
Nelson & Winter, 1982). In line with this statement, Feldman (2000) argues that
innovations are nothing more than the creation and diffusion of new and economically
valuable knowledge in the form of novel products, processes, and organizations while
Cowan and Jonard (2009) label innovation as the discovery of knowledge not known
by others.
During the time, knowledge management (KM) and innovation management
consecrated themselves as separate fields and distinct contexts of research. The first
one distinguishes itself as the new managerial discipline which aims to support the
processes of knowledge creation, dissemination, exploitation, memorization, re-use
and learning. The second one focuses on analyzing, designing and managing the
organizational activities and practices that transform an idea into a competitive
advantage. So, both of them focus on generating added-value and improving company’s
capacity of adapting to the challenges of the internal and external environment, and
tend to adopt a procedural approach; KM emphasizes the organizational processes
which must be developed in order to increase the value of the intangible assets while
Innovation management brings forward the processes that need to be followed in
order to create new concepts or to improve the existing organizational concepts.
Given these circumstances, it can be stated that KM has, implicitly or explicitly, a strong
relationship with innovation management. However, considering the overlapping
points of the two areas, it may be questioned whether the two kinds of literature are
converging or if KM and innovation management are different contexts of research and
application. As a consequence, the purpose of this paper is to examine how the
connection between KM and innovation management has been developed in the last
ten years.
The current paper is structured as follows. Section 2 emphasizes the research methods
and techniques that had been used in order to achieve the research goal while Section
3 brings forward the main results. The prospects of a tighter connection between KM
and innovation management, and the topics that could represent a shared focus of
study and application are brought forward in Section 4. The article closes by drawing
several conclusions and highlighting the research limits and several further research
directions.
664 Strategica 2016
Methodology
The purpose of this paper is to examine how the connection between knowledge
management (KM) and innovation management has been developed. In order to
achieve our goal, an etic approach is employed which encompasses an external view of
meaning associations and real-world events. Unlike the emic approach, the etic
perspective generates “descriptions and analyses expressed in terms of the conceptual
schemes and categories regarded as meaningful and appropriate by the community of
scientific observers” (Lett, 1990, p.130). Furthermore, Mott-Stenerson (2008, p.432)
claims that “the etic approach is exemplified through a review of literature for
thematic frameworks” while Fram (2013, p.7) states “the theoretical framework is a
process at the abstract level using relative theories and definitive concepts as
comparisons to gain understandings in order to describe, explain, or predict social
phenomena, which occurs when the etic perspective is maintained”. Nevertheless, a
documentary study is used which consists of a review of articles and studies from the
KM and Innovation management journals. The research is combining the qualitative
with the quantitative perspective and the whole multi-stage process is dominated by
an inductive approach. The inductive character is reflected by the fact that the focus is
on analyzing previously researched phenomena from a different perspective.
On a first stage, international databases like EBSCO, Scopus and Thomson Reuters are
analyzed in order to identify the journals that concentrate on analyzing and
disseminating KM or Innovation management studies. Initially, a list of 63 journals is
obtained; 31 of them aim to offer a forum for the fast dissemination of the Innovation
management studies while the other 32 claim to provide valuable insights on how and
why to manage the creation, dissemination, codification and exploitation of explicit
and tacit knowledge, organizational learning and intellectual capital. For selecting the
most representative journals from the KM area, the Serenko and Bontis (2004) list is
used. A similar procedure cannot be applied for the Innovation journals; therefore,
journal’s impact factor serves as a selection criterion. At the end of this stage, a list of
24 journals is obtained (Table 1).
Table 1. KM and Innovation journals included in the analysis
No. KM Journals Innovation Journals
1. Electronic Journal of Knowledge Asian Journal of Technology Innovation
Management (EJKM) (AJTI)
2. International Journal of Knowledge Creativity and Innovation Management
and Learning (IJKL) (CIM)
3. International Journal of Knowledge European Journal of Innovation
Management (IJKM) Management (EJIM)
4. International Journal of Knowledge Innovations in Systems and Software
Management Studies (IJKMS) Engineering (ISSE)
5. International Journal of Learning and Journal of Innovation and Entrepreneurship
Intellectual Capital (IJLIC) (JIE)
6. Journal of Information and Knowledge Journal of Pharmaceutical Innovation (JPI)
Management (JIKM)
7. Journal of Intellectual Capital (JIC) Journal of Product Innovation Management
(JPIM)
8. Journal of Knowledge Management Materials Research Innovations (MRI)
(JKM)
9. Journal of Knowledge Management Strategic management (SM)
Practice (JKMP)
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 665
10. Knowledge and Process Management Technology Analysis (TA)
(KPM)
11. Knowledge Management Research & Technovation (T)
Practice (KMRP)
12. Learning Organization (LO)
13. VINE
Further, the articles published during January 2006 – March 2016 which include in
title, abstract or keywords one of the next phrases “innovation”, “product
development”, “process development”, “product improvement”, “process
improvement”, “project management”, “knowledge”, “organizational learning”,
“intellectual capital”, “social capital”, “relational capital”, “structural capital”, and
“human capital” are selected. More than 800 articles are collected. Each article is
analyzed in order to determine its relevance for the research problem. In the next
phase, a content analysis is employed to the selected articles in order to facilitate the
achievement of the research goal. The content analysis is used as a research method
due to the fact that (i) it has an analytical flexibility; (ii) it is nonintrusive; and (iii) it
entails the specification of category criteria for reliability and validity tests (Duriau,
Reger & Pfarrer, 2007). The main categories in which the analysis focused are: (i) the
type of article; (ii) the approach; and (iii) the main topic. Besides, techniques like
systematization and tabling are used for identifying the nexus between knowledge
management and innovation. In the final stage, the papers are counted and classified,
the common topics are determined, and the prospects of a tighter connection between
knowledge management and innovation studies are emphasized.
Description of results
Based on the general results, only 20 journals offer valuable insights (Table 2) and
most of them belong to the KM area. Four journals are excluded due to at least one of
the following situations: (i) the selected keywords are not included in the articles
published during 2006 – 2016; (ii) the selected keywords are included in the articles
but they are not used in relation to KM or Innovation issues; (iii) the selected
keywords appear in article’s title, abstract or keyword section but they are not
developed further in article’s content. Thus, a total of 894 articles are collected; 461
are published in the KM journals while 433 appear in the Innovation journals. Starting
from this distribution, it may be assumed that the scholars who publish their work in
KM journals tend to highlight the connection between knowledge and innovation; they
focus on how to transform knowledge into action, how to make it visible and how to
increase its use in the organizational environment. A detailed analysis is presented
further
Table 2. KM and Innovation journals that provide valuable insights regarding the topics
approached typically in the other field
No. KM Journals Innovation Journals
1. Electronic Journal of Knowledge Asian Journal of Technology Innovation
Management (EJKM) (AJTI)
2. International Journal of Knowledge Creativity and Innovation Management
and Learning (IJKL) (CIM)
3. International Journal of Knowledge European Journal of Innovation
Management (IJKM) Management (EJIM)
666 Strategica 2016
4. International Journal of Knowledge Innovations in Systems and Software
Management Studies (IJKMS) Engineering (ISSE)
5. International Journal of Learning and Journal of Innovation and Entrepreneurship
Intellectual Capital (IJLIC) (JIE)
6. Journal of Intellectual Capital (JIC) Journal of Pharmaceutical Innovation (JPI)
7. Journal of Knowledge Management Journal of Product Innovation Management
(JKM) (JPIM)
8. Knowledge and Process Management Technology Analysis (TA)
(KPM)
9. Knowledge Management Research & Technovation (T)
Practice (KMRP)
10. Learning Organization (LO)
11. VINE
Literature trends
The analysis of the annual trends shows that the interest of the two kinds of literature
for the topic of the other field has remained substantially constant over time (Figure
1). As it can be noticed, there is no significant variation over the years; on average,
both types of journals publish around 40 papers per year which analyze various topics
and themes from the other field. Nevertheless, a special attention must be given to the
situation recorded in 2007, 2013, and 2014. During 2007 and 2013 an ascending trend
was registered among the innovation journals while the KM journals recorded a
descending trend; the situation reversed in 2014. Further analysis is needed in order
to eliminate local fluctuation and to determine whether there is a relationship between
these two evolution trends.
Figure 1. Papers of the KM and Innovation literature that approach topics typically treated
in the other field
If the keywords distribution is taken into account (Figure 2 and 3), it can be argued
that the interest in the “other field” is quite general and doesn’t regard specialized or
detailed subjects of study. The concept of “innovation” is by far the most used in the
analyzed KM papers (Figure 2), while the term of “knowledge” is frequently used as a
keyword in the Innovation papers (Figure 3); only a few papers are about a specific
topic.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 667
In the KM journals, 83.51% of the analyzed papers approach topics related to
“innovation” while 22.34% focus on specific issues like: product development (9.98%),
project management (9.54%), process improvement (2.39%), and process
development (0.43%). As it can be remarked from Figure 2, product development
represents a topic of interest for the researchers who published in the Journal of
Knowledge Management (JKM) while project management managed to attract the
attention of those who published especially in the Journal of Knowledge Management
(JKM) and VINE.
Figure 2. Distribution of papers based on keywords appearance – KM journals
In the Innovation journals, 83.60% of the analyzed papers approach topics related to
“knowledge” while 28.17% focus on specific issues like: organizational learning
(13.16%), social capital (6.47%), human capital (5.77%), intellectual capital (1.39%),
relational capital (0.92%), and structural capital (0.46%). As it can be remarked from
Figure 3, organizational learning and social capital represent an interest for the
researchers who published especially in the Journal of Product Innovation
Management (JPIM), European Journal of Innovation Management (EJIM), and
Technovation (T) while intellectual capital managed to attract the attention of those
who published especially in the Asian Journal of Technology Innovation (AJTI).
668 Strategica 2016
Figure 3. Distribution of papers based on keyword appearance – Innovation journals
As regards the type of study (Figure 4 and 5), papers based on empirical research are
largely prevailing in both kinds of literature. This may mean that reflections on the
development of conceptual or theoretical grounds are still missing, and scholars are
more interested in analyzing empirical data for incidental opportunities of specific
studies that fall in the intersection of the two kinds of literature.
In KM journals, 69.63% of the analyzed articles can be labeled as “research papers”
while 22.78% of them can be described as “conceptual papers”; only 7.59% of the
analyzed papers concentrate on exclusively reviewing the literature (Figure 4). Almost
half of the research papers are published in 3 journals, namely: Journal of Knowledge
Management (JKM), Electronic Journal of Knowledge Management (EJKM), and
International Journal of Learning and Intellectual Capital (IJLIC). On the other hand,
most of the conceptual papers are published in 6 journals, namely: Journal of
Knowledge Management (JKM), VINE, Electronic Journal of Knowledge Management
(EJKM), Learning Organization (LO), International Journal of Knowledge and Learning
(IJKL), and International Journal of Knowledge Management Studies (IJKMS). Last but
not least, the literature review articles seem to be more attractive for 4 journals,
namely: Journal of Knowledge Management (JKM), Electronic Journal of Knowledge
Management (EJKM), VINE, and Knowledge Management Research & Practice (KMRP).
Synthesizing, the conceptual papers are more appealing to Learning Organization (LO),
International Journal of Knowledge and Learning (IJKL), and International Journal of
Knowledge Management Studies (IJKMS) while the literature review articles tend to be
published especially in Knowledge Management Research & Practice (KMRP).
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 669
Figure 4. The main types of papers published in KM journals
In Innovation journals, 81.06% of the analyzed articles can be labeled as “research
papers” while 12.93% of them can be described as “conceptual papers”; only 6.01% of
the analyzed papers concentrate on exclusively reviewing the literature (Figure 5).
More than half of the research papers are published in 3 journals, namely: Journal of
Product Innovation Management (JPIM), European Journal of Innovation Management
(EJIM), and Creativity and Innovation Management (CIM). On the other hand, most of
the conceptual papers are published in 3 journals, namely: Asian Journal of Technology
Innovation (AJTI), Creativity and Innovation Management (CIM), and Technology
Analysis (TA). Last but not least, the literature review articles seem to be more
attractive for 3 journals, namely: Journal of Product Innovation Management (JPIM),
Creativity and Innovation Management (CIM), and European Journal of Innovation
Management (EJIM).
Figure 5. The main types of papers published in Innovation journals
Regarding the approach, it can be observed that the qualitative studies (e.g. case-study
research, qualitative speculations, etc.) prevail in both kinds of literature (Figure 6 and
670 Strategica 2016
7). This is more marked in the KM literature – which, however, reflects the tradition of
this field of study compared to the area of innovation management.
According to data presented in Figure 6, most KM journals focus on publishing
qualitative studies regarding innovation. However, an exception exists and it is
represented by the Knowledge and Process Management (KPM). Although there is a
small difference between the number of qualitative and quantitative studies (3
articles), the last ones prevail.
Figure 6. The scientific approaches encountered in KM journals
According to data presented in Figure 7, most Innovation journals focus on publishing
qualitative studies regarding knowledge management issues. However, two exceptions
exist and they are represented by the Innovations in Systems and Software
Engineering (ISSE) and Technovation (T). The first one published the same number of
qualitative and quantitative studies while in the second journal the quantitative
studies prevail.
Figure 7. The scientific approaches encountered in Innovation journals
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 671
Recurring themes and topics in KM and Innovation journals
This analysis focuses on the overall detection of recurring themes and topics in the two
kinds of literature: KM and innovation management.
a. KM papers that treat typical innovation topics
A first important area is that of Project Management. This is a typical subject in
innovation management, but in the last years there have been a growing number of KM
papers that directly focus on Project Management topics (Handzic & Durmic, 2015),
such as: knowledge sharing and project documentation; project team organization;
project-based companies; the use of KM technologies for managing projects etc.
Indeed, projects require intense flows of knowledge between the involved participants,
foster knowledge dissemination and use, support knowledge codification, and
stimulate knowledge creation. Due to these, the attention of KM scholars and
practitioners has increased; as it was mentioned before, 9.54% of the papers published
in the KM journals address the project management issue.
A second area is represented by the implications of KM programs on innovation
performance and companies’ innovative capabilities. In other words, some studies
attempt to investigate how the KM programs implementation can improve companies’
capacity to react to external inputs and to innovate. As a matter of fact, the earlier KM
applications were mainly targeted to the problem of capturing-storing-reusing
knowledge especially for improving companies’ efficiency. Later, it has been
underlined that the production and management of innovation also requires a
capability to exploit the existing knowledge contents and sources (Du Plessis, 2007). In
other words, in order to innovate, the companies must identify their main sources of
knowledge and they must be capable of exploiting it. Further, the nexus between KM
and innovation strategy can be approached since it emphasizes how could a company
use innovation as a strategic weapon (López-Nicolás & Meroño-Cerdán, 2011). For
example, a special attention can be given on how to plan and design the KM programs
so they can fit company’s innovation strategy. Indeed, the topic of knowledge strategy
– i.e. formulating a strategy to strengthen company’s cognitive capabilities – has direct
implications on the innovation strategy since it is deemed that a company can innovate
effectively only if it manages appropriately its cognitive resources (Bratianu &
Bolisani, 2015).
Product development is another issue that is often treated in the KM papers
addressing innovation themes (Prieto, Revilla & Rodríguez-Prado, 2009). On the one
hand, designing new products implies innovative capability but also an explicit
capability of: (i) creating new knowledge, (ii) managing the existing one, and (iii)
connecting with external sources. Therefore, for KM scholars, product development
becomes a possible field of application of KM practices. In other words, it is the area
where knowledge becomes visible, tangible and easy to quantify.
Last but not least, the R&D management is also a typical topic in innovation
management which has captured the attention of the KM scholars (Leon, 2015; Park &
Kim, 2006). The link between them is more visible and strong due to the fact that R&D
is an area where knowledge workers and cognitive assets represent the core resource
(Leon, 2011, 2015). The employees are the owners of individual knowledge and the
672 Strategica 2016
only ones capable of transforming all the other organizational resources based on their
values, beliefs, skills, attitudes and competencies.
b. Innovation papers that treat typical KM topics
Considering that innovation, in itself, implies the generation, acquisition, and transfer
of knowledge, an important KM area from where scholars have drawn models,
concepts or simple terms is that of KM processes.
A second important KM topic is that of communities where different people
collaborate and share knowledge for a common goal. For example, the literature on
communities of practice, which are a popular topic in KM, has also become of
particular interest for innovation scholars (Bertels, Kleinschmidt & Koen, 2011). This
situation appeared due to the fact that in many cases the production and management
of innovation are based on sharing knowledge in structures that recall the concept of a
community of practice. On the other hand, against the backdrop of a fast technological
process, most companies use virtual communities in order to gain access to higher and
various amount of knowledge with lower costs (in terms of both time and money).
A third topic is represented by SMEs. Apparently, the management of innovation in
small companies implies a peculiar consideration of the special processes and
mechanisms of KM that occur in these environments (Du, Wu, Lu & Yu, 2013).
Especially, the management of tacit knowledge becomes a critical issue. Consequently,
innovation scholars often adopt KM models or concepts to explain innovation in SMEs.
Discussions
The prospects of a tighter connection between the area of innovation management and
KM rest on the development of the common points of interest that characterize the two
kinds of literature, and the topics that can therefore represent a shared focus of study
and application. Some of these are highlighted further.
a. Knowledge-based view of the firm; learning organization
Under a KM perspective, the company is naturally seen as an organization where
knowledge is the basic resource. So, even when KM scholars don’t mention it, the
knowledge-based view of the firm (Grant, 1996) is the implicit theoretical framework.
Another reference theory is that of the learning organization (Senge, 1990). In
innovation studies, both the knowledge-based theory and the learning organization
theory are just one of the possible references. However, these conceptual approaches
have gained popularity in recent times: an innovative company is increasingly seen as
an organization “that learns”, and where knowledge resources are considered and
exploited intensively. Therefore, a further development of these two theoretical areas
and of their practical implications for both KM and innovation management can be a
first important intersection point of the two fields.
Knowledge Management and Innovation: from Soft Stuff to Hard Stuff 673
b. Knowledge-intensive business services (KIBS)
KIBS are companies whose main characteristic is, by definition, to exploit knowledge
resources for providing services to other companies (Miles, 2005). KIBS are, therefore,
an elective object of analysis of KM studies, because it is important to investigate how
these knowledge resources can be effectively developed and used for business
purposes (Smedlund & Toivonen, 2007). At the same time, the role of KIBS for
innovation is increasingly recognized in the innovation management literature
(Chairatana, 2009). KIBS are therefore a second important topic where a joint analysis
that adopts a KM and an innovation management approach can be useful and
important.
c. Knowledge protection, intellectual property
The management of intellectual property is, clearly, a central topic in innovation
management. While patents and their management have often been the focus of
analysis, in consideration of the importance of “intangibles” that also include
intellectual capital, there is an upsurge of interest in the investigation of protection
methods not only in the form of patents (Hurmelinna, Kyläheiko & Jauhiainen, 2007).
Especially, there is recognition that knowledge is the main ingredient of intellectual
property. This implies a definition of appropriate methods that, clearly, involves not
only concepts and theories developed in the innovation management field, but also
those that are typical of KM (Bolisani, Paiola & Scarso, 2013). At the same time, in the
KM literature, there is growing interest in the relationship that a company has with
external entities like suppliers, customers, or competitors. The economic value of
knowledge is seen in relation to the knowledge exchanges that occur, which also raises
the issue of protection (Roy & Sivakumar, 2011).
d. Networks and networking
In innovation management, the analysis of networks is increasingly important
(Cantner, Meder & Ter Wal, 2010). Especially with the upsurge of R&D collaboration
and open innovation approaches (Bergman, Kärkkäinen, Jantunen & Saksa, 2010), it is
recognized that a company must extend its reach to external sources of valuable
knowledge. The processes by means knowledge are captured, assimilated, and
integrated into a company’s base are essential for managing innovation. Therefore, the
analysis of collaboration networks becomes important for innovation management
(Hardwick, Anderson & Cruickshank, 2013), not only in terms of structural aspects (i.e.
network configuration, the role of nodes, etc.) but also of the mechanisms of
knowledge transfer and sharing that are or can be adopted. Again, the KM literature
can become an important source for innovation studies.
Conversely, the consideration that knowledge exchanges in networks and their
functioning are particularly important in the case of joint R&D and product
development provides a fresh area of study and application to KM scholars and
practitioners (Fang & Pigneur, 2010).
674 Strategica 2016
Conclusions
The research findings have both theoretical and practical implications. On the one
hand, it synthesizes how the link between KM and innovation management evolved in
the last 10 years. As it has been proved, according to the annual trends, the interest of
the two kinds of literature for the topics of the other field has remained substantially
constant over time.
On the other hand, the results of this research may serve as a handbook of managerial
guidelines; it brings forward the KM approaches and tools which can be used for
product or process innovations. The studies published in the last 10 years had already
brought forward the link between knowledge and several aspects like: product and
process development, project management, and process improvement, and also the
relationship between innovation and KM various issues, such as: organizational
learning, intellectual capital, social capital, human capital, relational capital, and
structural capital.
Despite its valuable insights, the research is limited by the number of keywords
searched in international databases like, EBSCO, Scopus and Thomson Reuters, and
also by the fact that the analysis only centered on the KM and Innovation journals.
Significant papers which link KM and innovation may have been published in general
management or strategic management journals. However, although what was found in
the analyzed studies is just a fraction from what was written, it is still able to reflect
the weak connection between specific KM topics and various innovation management
issues. As it was previously highlighted, the nexus between KM and innovation tends to
be approached from a wider, general perspective. On the other hand, the intention was
not to offer a complete overview of the issue but rather to present the interest of the
KM journals on the topics which are usually analyzed in the Innovation journals, and
vice versa.
Starting from these, several directions for further research may be identified, namely:
(i) extending the analysis at the level of all management journals, indexed in Scopus
and Thomson Reuters databases; (ii) analyzing the specific topics on which knowledge
and innovation intersect; (iii) determining the KM and innovation topics which are
mainly approached from a qualitative perspective; and (iv) determining the KM and
innovation topics which are mainly approached from a quantitative perspective.
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International and Intercultural
Management Challenges
International and Intercultural Management Challenges 679
THE ROLE OF INTERNATIONALIZATION IN THE FIRM’S LIFE CYCLE:
A DECISIONAL MODEL FOR ESTABLISHING THE MOST SUITABLE
STRATEGIC PARTNERSHIP
Ana-Maria GIUREA
Bucharest University of Economic Studies
6 Piața Romană, 010374, Bucharest, Romania
ana.giurea@yahoo.com
Abstract. The paper highlights a hypothetical decisional model built with the purpose of
filtering subjective values assigned by firms through a mechanism that transposes them
into objective results without influencing the choices of the potential partners. There is a
critical moment when the firms must surpass it using suitable internationalization and
partnership choices without affecting the choices of the partner firms involved in the
model. Among the firms’ internationalization options, I lay emphasis on three models of
internationalization: the progressive model focusing on the Uppsala model and the
product’s life cycle, the dependent model known as the eclectic model and the
international business network model. When the firm surpasses its condition on the
domestic market, its own needs will determine it to capitalize new opportunities in other
markets. If we take into consideration the costs of an international approach, firms would
prefer to take their first steps on a foreign market alongside a partner. Prospecting a new
market involves costs and time, therefore the guidance of a local partner could prove to
be of great use especially because the partner firm is able to offer sources of information
and knowledge regarding the political environment and the market conditions. If the
partners’ decisions are set on a common point of view, then the first step in establishing a
partnership has already been made. As mentioned in the methodology of the model, the
firms will assign values according to the benefits that each type of partnership can offer
to them. Each firm will measure its table values through its own calculation strategies
keeping into account all of the vectors that would have an impact on the development of
the firm at an international level. Whether the firms are interested in forecasting the
sales of a future partnership, exchanging know-how or identifying restriction barriers
imposed by the host state, the values will be assigned according to the interests of the
firms involved in the analysis.
Keywords: decisional model; strategic approach; internationalization; partnerships;
progressive model; eclectic model; network mode.
Introduction
The expansion of economic relations on the international market was developed using
a range of processes that had a major impact on the world economy. Such processes
had followed the worldwide trade development and the abroad investments growth.
Moreover, early internationalization of larger companies rushes the evolution process
of their global activity. However, the internationalization process can take longer for
companies that prefer to examine external factors and different issues on the target
market very carefully. In other words, a market entry’s speed is different from one
company to another and most often, it is determined by its perception of risk that can
680 Strategica 2016
prevent the internationalization on a market. Last but not least, the
internationalization strategy remains optional for the firms, but by not adopting such a
strategy in time, the firm could find itself in difficulty. Overall, the internationalization
has an important role in the firm’s life cycle. A good decision regarding
internationalization can generate profit and growth for the company, taking advantage
of the opportunities provided by the new market. A bad decision or a wrong move can
turn out to be dramatic for the firm and in some cases this could be fatal.
Overview
Nowadays internationalization represents the option for the companies’ growth
perspectives within the international transactions. Firms emphasize on knowledge,
information, and experience obtained along with their life cycle and they are
continuously protecting these advantages against their rivals. When they reach a stage
of maximum development on their own market, the companies will aim to extend their
activities to international markets in order to capitalize their opportunities, fulfilling
their profit and growth objectives, getting access to resources, technological
competencies and finally yet importantly reducing costs within their basic activities
through scale economies (Sullivan & Sheffrin, 2003).
An overview of internationalization models
Among the firms’ internationalization options, I will emphasize on three models of
internationalization: the progressive model focusing on the Uppsala model and the
product’s life cycle (Raymond, 1966), the dependent model known as the eclectic model
and the international business network model.
- The progressive model describes a “rings in the water” type of internationalization
(Madson & Sevais, 1997). In other words, it is the case of a gradual and slow
internationalization, which requires efforts in order to acquire knowledge regarding
the geographic area’s particularities, the methods for entering different markets and
the product policy. According to Raymond (1966), the life cycle of a product includes
four stages: “new product”, “growth product”, “maturity product” and “obsolescence
product”. In other words, developing products works gradually and progressively
according to the stages defined by Raymond.
Between 2006 and 2013, Blomstermo, Sharma, and Klug have quoted Johanson and
Valhne in their work. These authors are the ones that defined the Uppsala Model.
Mainly, the model describes a theory based on the way that firms extend their
activities on foreign markets. The authors have started from the premise of the
evolutions of the activities developed by the manufacturing companies in Sweden, and
based on an in-depth analysis they have concluded that “the lack of knowledge
represents an important obstacle in the way of developing international transactions”
(Pignatti). Therefore, the Uppsala model reminds us of knowledge achievement and
learning capacity. Thus, the lack of specific market knowledge caused the Swedish
production firms to develop their international transactions in a slow manner (step-
by-step). In his work, Klug (2006) has analyzed 16 German firms by interviewing them
about the strategies that they have applied and their motivation to enter new markets.
International and Intercultural Management Challenges 681
He talks about their operational structure and investigates different theories regarding
the decision factors that determine firms to extend their activities to foreign markets.
Tan, Brewer, and Liesch (2008) have managed to improve the Uppsala model. They
have completed the Uppsala model by adding the firm’s pre-internationalization phase,
identifying the attitude triggers, motivations, resources and different rigidities for 274
Australian export and non-export firms. Firstly, the study improves the theoretical
foundation established in the stages of the traditional theories of the firm’s
internationalization, by identifying a transition point between pre-internationalization
(the learning phase of a firm) with its four factors (exposure triggers, psychological
commitment, rigidity and the firm’s resources) and its first international commitment
(commonly export). Secondly, using a national survey carried out in Australia, the
following results suggest that the study has potential practical implications,
representing an evaluation instrument for the firms as well as for the government. The
weaknesses of the research reside in the fact that it is conducted only on Australian
firms, and the sample of the study has relatively reduced dimensions.
Johanson and Vahlne (2009) reviewed the Uppsala model motivating that the business
changed over time and that the model has not taken into consideration certain
characteristics that have further developed. The argument of these two economists
brings to the fore the following concept: “network research (...) markets are networks
of relationships in which firms are linked to each other in various, complex and, to a
considerable extent, invisible patterns” (Johanson & Vahlne, 2009). They have raised
attention to concepts like “insiders” and “liability of outsiders”. The initial 1977 model
highlighted conditions like “market knowledge” and “market commitment” that
targeted “commitment decisions” and “current activities”. The improved 2009 model
outlines conditions like “knowledge opportunities” and “network position” that target
“relationship commitment decisions” and “learning, creating and trust-building”
(Johanson & Vahlne, 2009). Starting from the idea of internationalization in a foreign
market, Johanson and Vahlne (2009) have explained the concept of “liability of
foreignness”, that is defined by “psychic distance”. In other words, an investor prefers
to internationalize on a market that is closer to the domestic market from a geographic
point of view. The authors considered that a pre-internationalization phase is
necessary. Thus, a stage for preparing the internationalization becomes relevant for all
kinds of firms. In their paper, the authors have concluded that when a firm firstly
initializes the export decision, it gets out of the pre-internationalization phase.
- The dependent model of internationalization expresses the connection of the firm with
the transaction costs using the eclectic model, where foreign direct investments and
export are in the spotlight. According to Dunning (1977), a firm will start to
internationalize if it holds certain advantages related to property, localization and
internalization, a theory known as OLI (ownership, location, internalization).
Presuming that foreign investors already possess certain competitive property
advantages, being capable of internalizing transactional costs, the remaining key factor
is the one related to the decision-making process for locating host countries. In her
paper, Stefanović (2008) addresses this exact aspect. At this moment, the foreign direct
investment is the basic mechanism of capital flows in the globalized economy and
represents an important factor for the countries’ economic development. For the host
country, foreign direct investments (FDIs) contribute to the development of the
682 Strategica 2016
business environment, to increasing exports and employment growth, as well as to the
acceleration of economic development.
According to the study carried out by Agarwal and Ramaswami (1992), the firms that
are interested in external markets activities are experiencing the need to make a
decision in order to choose the way to enter a certain market. The above-mentioned
economists mention options like export, licensing, joint ventures connected to three
categories of advantages: owning properties, locating markets and internalizing
transactions.
-Developed by Johanson and Mattson in 1988, the network approach is a model, which
describes the “degree of internationalization of the firm” and the “degree of
internationalization of the network”. Practically, the model is based on “relationships”
that “are continuously established, developed, maintained and dissolved with the aim
of achieving the objectives of the firm”. Johanson and Mattson (1988) have highlighted
the model by defining four internationalization stages (Figure 1).
Figure 1. Internationalization approaches (Laine & Kock, 2000)
The internationalization decision
When the firm surpasses its condition on the local market, its own needs will
determine it to capitalize new opportunities in other markets. If we take into
consideration the costs of an international approach, firms would prefer to take their
first steps on an external market alongside a partner. Prospecting a new market
involves costs and time, therefore the guidance of a local partner could prove to be of
great use especially because the partner firm is able to offer information and
knowledge regarding the political environment and the market conditions.
Madson and Servais (1997) mentioned in their work the “born global” concept. This
was illustrating the fact that since the establishment of a business, or on a short while
after this, the firms start to take into consideration the adoption of international
approaches. The article contributes to this concept in three ways: it lays down the
empirical evidence reported by Born Globals, it emphasizes the theoretical concepts
and offers a new view on the research. Their conclusion sets forth the idea that “Born
International and Intercultural Management Challenges 683
Globals grow in a way which may be in accordance with evolutionary thinking” (Laine
& Kock, 2000).
In Dimitratos et al. (2011), “the cultural relativity theory” is being used in order to
explain the way firms in different countries are willing to become partners. They have
conducted a study on a sample of 528 small and medium enterprises in the USA, Great
Britain, Greece and Cyprus using hypotheses like “relationships between hierarchical
decentralization and power distance, lateral communication, and individualism, and
formalization and uncertainty avoidance”. The fact that cultural differences between
firms represent a barrier in the process of establishing strategic alliances must not be
ignored.
Being inspired by the Uppsala model, Chetty et al. (2014), have developed “an
appropriate conceptualization and a reliable and valid measure of the speed of
internationalization”. Based on an empirical analysis, the authors have concluded that
there is a positive correlation between performance on foreign markets and the speed
of internationalization. Some economists have defined the speed of
internationalization in different ways: Casillas and Moreno-Menendez (2013) state
that “speed is the relation between the internationalization process and time”, Casillas
and Acedo (2013) considered speed to be a “relationship between time and a
company’s international events”.
According to Popa and Filip (1999), the main reasons for which firms prefer to
internationalize are of two types: offensive reasons (proactive) and reactive reasons
(defensive). Among the proactive reasons (offensive) they specify:
- the access to resources (mainly it is the case of establishing inter-firms collaborations/
long-term contracts/ strategic alliances in order to improve the inputs supply chain
and intermediary products),
- the technological advantage (it is mainly used in order to obtain a competitive
advantage in different markets),
- scale economies, reducing total costs and creating competitive advantages (Likewise,
the taxation policy of the host country may be more relaxed in a place where taxes are
lower and fewer, diminishing the chances of strangling the company’s life),
- exclusive information (I consider that besides the fact that daily the firms face the
need to manage the life cycles of their own products, most of the time they need to gain
as much information as possible in order to prolong their existence. In my opinion, at
the moment, for any firm, assimilating information and transforming it into know-how
contributes more or less to the extension of the activity that it performs).
Popa and Filip (1999) complete the antithesis of the abovementioned reasons with the
reactive (defensive) ones:
- market pressure (it is the case of firms that are being strangled by the presence of
local competitors, hence they will prefer to redirect their efforts towards other
international markets);
- decreasing sales on the domestic market (when the market becomes saturated and
there are powerful competitors on the market already, there will be an impact on the
firm’s turnover because consumers will turn to other interchangeable products if the
offer of other companies is better);
684 Strategica 2016
- overproduction (in this case, the demand on the internal market shrinks and an excess
of products and stocks respectively appears, and thus the firm will resort to exports on
the international market);
- the excess of capacity (through its resort to the foreign market, the firm can use at a
maximum level its entire technological capacity at its disposal at that time and so it has
the chance to test its own forces in adapting and diversifying its offer according to the
market);
- customer loyalty (in order to be closer to customers, from a geographic point of view,
the firm finds itself in a situation when it needs to move its location in the country in
which its clients are more numerous in accordance to the ones present on the domestic
market).
Methodology
The hypothetic decisional model presented in the current section contributes to the
calculation and illustration of the best decisions that the firms can make regarding the
type of internationalization and the partnership model. There is a critical moment that
the firms must surpass using suitable internationalization and partnership choices
without influencing the choices of the partner firms involved in the model.
We will start by assigning values between 0 and 10 to the potential partnerships (0
represents zero chance for establishing a partnership and 10 means that establishing a
partnership will offer maximum satisfaction to the firm). In other words, the values
will be assigned according to the benefits offered by each type of partnership. These
values are classified between the three main internationalization pillars: progressive
strategic approach, dependent strategic approach (eclectic model) and international
business network approach.
The hypothetical model is based on decisional stages that need to be followed in order
to establish a suitable partnership based on one of the strategic approaches mentioned
above.
In the first decisional stage, the firms must take into consideration the following
mathematic relation: in max S (iaS, ibS,...,izS), where i = the firm, a,b,..,z = the partners, S
= the type of strategic approach. The model’s mechanism works as following: in the
first phase, “i” firms will opt for the maximum decisional value in relation to which, the
minimum decisional value will be established for each firm.
If the decision of firm “i” will not be equal to the decision of one or more partners (for
instance iaS = AiS), then the partnership will not be established. In this case, the firm
“i” will pass on to its next available decision applying the same decisional process.
Before passing to Decision 2, the common choices that the firms opted for will be
identified. The process cycle will resume along with Decision 2 which will be
conditioned by the following relation: iII: max S (iaS, ibS,...,izS) = Decision 1 > Decision 2
min S (iaS, ibS,...,izS). The new rin results will be transposed into a chess table similar
to the one found at the end of the section.
For Decision 2, the obtained results will firstly be compared to the “remaining” results
from Decision 1, and then the newly obtained ri2 values will be compared to each other.
International and Intercultural Management Challenges 685
Thus, the decisional process will resume in the same aforementioned conditions until
“Decision N” will be equal to [min S (iaS, ibS,...,izS)], in other words i n: max S (iaS,
ibS,...,izS) = Decision 1 > Decision 2 >... Decision N = min S (iaS, ibS,...,izS).
The Decision N relation will look as following: in: max S (ixS, iyS, izS) > max S (ixS, iyS,
izS) – [max S (ixS, iyS, izS) – the next smaller value] min S (ixS, iyS, idzS). After each
decisional stage, the new values will be compared to the values of the decisions in the
order of their importance (for example: firstly, the values of Decision N (rin) will be
compared to the values of Decision 1, respecting the order of the decisions.
Then we proceed to verify if the obtained values for in are the same as the values
obtained for i1, i2,..,in-1, in maintaining the order of their importance and respecting their
classification from column S. As soon as a common value will be identified, the result
will be registered in a table of results. If a result is already filled in the table, this result
will be maintained even if a new result is found in another stage of the process.
Model visibility
All of the possible relations between four participating firms can be found in the table
below (Table 1). These are built based on the strategic internationalization approaches
mentioned in the current section.
Table 1. The “Chess” of the strategic approaches for the four firms
*A, B, C, D – firms,
**P = progressive strategic approach, E = dependent strategic approach; I = international business network
approach
According to the methodology, for columns P, E, I the maximum values will be chosen,
keeping in mind that the biggest value will be equivalent to the best decision for the
686 Strategica 2016
firm, and the smallest value will represent the worst decision for the firm. We will use
firm A as a reference element, in order to highlight the formulas.
Decision 1 for firm A will be:
rA1: max P (AbP, AcP, AdP); max E (AbE, AcE, AdE); max I (AbI, AcI, AdI);
For example, if the best decision for firm A is also the best decision for firm C, then the
registered result will represent the establishment of the partnership. In other words, if
rA1(value) = rC1(corresponding value) then the firms’ share similar opinions and are heading
towards the same decision. This represents the best choice for both firms, and their
chances of establishing a partnership reach a maximum peak for the analyzed values.
Decision 2 for firm A will be chosen only if the following relations are being respected:
rA2 : max P (AbP, AcP, AdP) > max P(AbP, AcP, AdP) – [max P (AbP, AcP, AdP) – the next
smaller value] min P(AbP, AcP, AdP);
max E (AbE, AcE, AdE) > max E (AbE, AcE, AdE) - [max E (AbE, AcE, AdE) - the next
smaller value] min (AbP, AcP, AdP);
max I (AbI, AcI, AdI) > max I (AbI, AcI, AdI) - [max I (AbI, AcI, AdI) - the next smaller
value] min I (AbI, AcI, AdI);
We need to check if the obtained values for rA2 are the same as the values obtained for
rA1 and afterward these values will be compared to each other (the values obtained for
A2). The decision process will resume under the same conditions presented above until
the rAn for firm A will be equal to [min S (ibS, icS,idS)], where rAn: max S (ibS, icS,idS) =
Decision 1 > Decision 2 >... Decision N = min S (ibS, icS,idS).
An: max P (AbP, AcP, AdP) = Decision 1 > Decision 2 >...> Decision N min P (AbP, AcS,
AdS)
max E (AbE, AcE, AdE) = Decision 1 > Decision 2 >...> Decision N min E (AbE, AcE,
AdE)
max I (AbI, AcI, AdI) = Decision 1 > Decision 2 >...> Decision N min I (AbI, AcI, AdI)
We proceed to verify if the values obtained for An are the same as the values obtained
for A1,A2,..,An-1,An. maintaining the order of their importance and respecting their
classification from column S, in our case: P, E, I.
Model simulation
Firms A, B, C, D establish their own values for potential partnerships. After setting their
values, they will be assigned in the tables bellow (Table 2).
International and Intercultural Management Challenges 687
Table 2. Assigned values for firms A, B, C, D
For Decision 1 we obtain:
A1: max P (AbP, AcP, AdP) = 8; max E (AbE, AcE, AdE) = 7; max I (AbI, AcI, AdI) = 9.
B1: max P (BaP, BcP, BdP) = 10; max E (BaE, BcE, BdE) = 8; max I (BaI, BcI, BdI) = 3.
C1: max P (CaP, CbP, CdP) = 8; max E (CaE, CbE, CdE) = 8; max I (CaI, CbI, CdI) = 8.
D1: max P (DaP, DbP, DcP) = 10; max E (DaE, DbE, DcE) = 7; max I (DaI, DbI, DcI) = 10.
P1: rA1 = AC; rB1 = BC; rC1 = CA; rD1 = DA; => rA1 = rC1 => (AC,CA) = (8,8)
E1: rA1 = AC; rB1 = BD; rC1 = CD; rD1 = DC; => rC1 = rD1 => (CD,DC) = (8,7)
I1: rA1 = AD ; rB1 = BA,BD; rC1 = CB; rD1 = DC;
For Decision 2 we obtain:
If 8= Decision 1 > 8- (8-7) 6 then A2: max P (AbP, AcP, AdP) = 7
If 10 = Decision 1 > 10- (10-9) 9 then B2: max P (BaP, BcP, BdP) = 9
If 8 = Decision 1 > 8- (8-6) then C2: max P (CaP, CbP, CdP) = 6
If 10 = Decision 1 > 10- (10-7) 5 then D2: max P (DaP, DbP, DcP) = 7
If 7 = Decision 1 > 7 – (7-5) 4 then A2: max E (AbE, AcE, AdE) = 5
If 8 = Decision 1 > 8- (8-4) then B2: max E (BaE, BcE, BdE) = 4
If 8 = Decision 1 > 8- (8-5) then C2: max E (CaE, CbE, CdE) = 2
If 7 = Decision 1 > 7- (7-6) 2 then D2: max E (DaE, DbE, DcE) = 6
If 9 = Decision 1 > 9 – (9-5) 4 then A2: max I (AbI, AcI, AdI) = 5
If 3 = Decision 1 > 3- (3-2) then B2: max I (BaI, BcI, CdI) = 2
If 8 = Decision 1 > 8- (8-5) then C2: max I (CaI, CbI, CdI) = 5
If 10 = Decision 1 > 10- (10-5) 4 then D2: max I (DaI, DbI, DcI) = 5
P2: rA2 = AB; rB2 = BA; rC2 = CD; rD2 = DB; =>
The remaining values P1: rB1 = BC; rD1 = DA;
688 Strategica 2016
rA2 = rB2 => (AB,BA) = (7,9)
E2: rA2 = AB; rB2 = BA; rC2 = CB; rD2 = DB;
The remaining values E1: rA1 = AC; rB1 = BD; =>
rA2 = rB2 => (AB,BA)= (7,9)
rD2 = rB1 => (DB,BD) = (6;8)
I2: rA2 = AC; rB2 = BC; rC2 = CD; rD2 = DA;
The remaining values I1: rA1 = AD; rB1 = BA,BD; rC1 = CB; rD1 = DC; =>
rD2 = rA1 => (DA,AD) = (5,9)
rB2 = rC1 => (BC,CB) = (2,8)
The results of the decisions are presented in the table below (Table 3):
Table 3. Simulation model results
A B C D
P2 9 P1 8 I1 5
A 7 P2 8 P1 9 I2
P2 7 I2 8 E1 6
B 9 P2 2 I1 8 E2
P1 8 I1 2 E1 7
C 8 P1 8 I2 8 E1
I2 9 E2 8 E1 8
D 5 I1 6 E1 7 E1
Results interpretation
After the firms chose their values in the first decisional stage, two partnerships were
established. One of the partnership was established between firms A and C with the
value (AC, CA) = (8,8) within the model P and the second partnership was established
between C and D with the value (CD,DC) = (8,7) within the model E.
In the second decisional stage, four partnerships were established. For the partnership
between A and B, their best common values (7,9) originating in the same stage
(Decision 2) determined the partners to opt for the model P. Likewise, all of the four
firms opted for the model I and established partnerships in distinct decisional stages
(BC,CB) = (2,8) and (AD,DA) = (9,5). The only firms that have opted for the model E
were B and D, and their values (8,6) were registered in distinct stages.
International and Intercultural Management Challenges 689
Conclusions and implications
The decisional model is purely theoretical and hypothetical being built with the
purpose of filtering subjective values given by firms through a mechanism that
transposes them into objective results without influencing the choices of the potential
partners.
When a firm finds itself in a situation in which it surpasses its own condition on the
domestic market, it will face the need to explore new opportunities in other markets
using different strategic approaches. In my opinion, a firm faces its crucial moment in
its development when it needs to establish a new strategic approach by choosing a
type of partnership in the context of internationalization. A right decision at such a
critical moment offers the firm trust in its own powers and the much-desired comfort
in this kind of situation. A wrong choice could create substantial losses in terms of
financial efforts, time and opportunity cost.
We stress that the solution should not be confused with the decision. There may be
multiple solutions, more or less appropriate, for a need/problem, while the best
decision can only be one. According to the general formula, the opportunity cost
represents the value in any major choice between two possibilities.
I believe that the classification of all possible solutions transposed into decisions and
the establishment of common decisions for potential partnerships remain key
elements for choosing an appropriate strategic international partner.
If their decisions are set on a common point of view, then the first step in establishing a
partnership has already been made. As mentioned in the methodology of the model,
the firms will assign values according to the benefits that each type of partnership can
offer to them. Each firm will measure its table values through its own calculation
strategies keeping into account all of the vectors that will have an impact on the
development of the firm at an international level. Whether the firms are interested in
forecasting the sales of a future partnership, exchanging know-how or identifying
restriction barriers imposed by the host state, the values will be assigned according to
the interests of the firms involved in the analysis.
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International and Intercultural Management Challenges 691
CULTURAL INTELLIGENCE IMPLICATIONS FOR MANAGEMENT AND
LEADERSHIP: APPLYING THE CULTURAL INTELLIGENCE SCALE IN
EASTERN EUROPE
Richard Boyd JOHNSON
Indiana Wesleyan University
Indiana, United States of America
boyd.johnson@indwes.edu
Diana MIRZA-GRISCO
Independent
Chisinau/ Berlin, Republic of Moldova / Germany
mirzadianna@yahoo.com
Svitlana BUKO
Independent
Ljubljana, Slovenia
svitlana.buko@gmail.com
Abstract. This paper discusses the transferability of the cultural intelligence scale (CQS)
in the Eastern European context, focusing on the Ukrainian and Moldovan cases. The
cultural intelligence construct is defined as the ability of individuals to function
effectively in culturally diverse situations. The authors build upon their earlier research
on cultural intelligence in Ukraine and Moldova, and develop a comparative assessment
based on the four-factor model of cultural intelligence: (a) cognitive – “an individual’s
cultural knowledge of norms, practices, and conventions in different cultural settings”
(Van Dyne et al., 2008, p.16), (b) metacognitive – “an individual’s cultural consciousness
and awareness during interactions with those from different cultural backgrounds” (Van
Dyne et al., 2008, p.16), (c) motivational – “an individual’s capability to direct attention
and energy toward cultural differences” (Van Dyne, et al., 2008, p.16), and (d) behavioral
– “an individual’s capability to exhibit appropriate verbal and nonverbal actions when
interacting with people from different cultural backgrounds” (Van Dyne, et al., 2008,
p.16). This has a crucial meaning for leadership in business in our globalizing world and
economy, where there is a compelling need to operationalize and understand what type
of cultural skills and abilities managers and leaders need in specific organizational and
geographical contexts. The study advances the research in the cultural intelligence field
by analyzing the cultural realm at the national level in two relatively recently emerged
Eastern European countries. The novelty of the study consists in the national approach
that it develops, as well as its Eastern European focus. The newly emerged countries in
the Eastern European region are striving towards sustainability and economic growth,
while at the same time facing major geopolitical and social challenges. In this context, the
research of cultural intelligence opens new possibilities for the study of other processes
and phenomena linked to cultural adaptation in the region.
Keywords: cultural intelligence; leadership; cross-cultural transferability of CQS.
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Introduction
The analysis of intercultural work environments has become a very important focus of
organizational management and leadership studies in the private, public and non-
profit sectors. It is not sufficient to acknowledge and describe the existence of cultural
diversity, the new business patterns require knowledge and the development of
certain skills that would enable leaders and managers to operate easily in such
environments.
Cultural intelligence represents the “capability of individuals to function effectively
across cultures” (Van Dyne, Ang & Livermore, 2010, p.132). Nonetheless, the cultural
component can refer here to various layers of culture as well, e.g. national, regional,
organizational, etc. And cultural intelligence abilities do not refer to knowledge of
approaches, norms, values of a single culture or of a set of cultures but it equips
leaders and managers with the ability to understand different cultural settings and
enables them to lead more effectively in such environments.
There has been no other testing to date to determine whether the concept of cultural
intelligence is transferable to countries in Eastern Europe, except for Johnson's
research (2013-2014; 2015), which tested the scale in Ukraine and Moldova. In the
national study conducted in Moldova in 2015, 1,250 participants have filled in the
adapted questionnaire, and 1,200 participants filled it in in Ukraine in 2013. The
authors found significant similarities between the two countries, but also relevant
differences. The difference in size and administrative organization was taken into
account during the analysis, as well as the presence of political - territorial conflicts,
which, as the authors concluded, have impacted the cultural intelligence scores.
By measuring cultural intelligence at the national level in the Republic of Moldova and
in Ukraine, the authors have also intended to better understand the cultural
intelligence leadership potential in these countries.
Theoretical background
Academics and practitioners alike posit that organizations aiming at integration into
the global market must promote managers and leaders that can face cross-cultural
situations and issues. Academic research has focused however mainly on Western
contexts, and on the individual cultural intelligence assessment within organizational
or group settings.
Cultural intelligence defined as “an individual’s capability to function and manage
effectively in culturally diverse settings” (Ang & Van Dyne, 2008, p.3) was first
introduced in 2003. The concept was thus operationalized into a Cultural Intelligence
Scale (CQS), developed and tested for validity by Eearly and Ang (2003), based on
Sternberg’s multiple loci of intelligence. The CQS was developed based on four factors
and contains 20 items, measuring the four primary factors which represent distinct CQ
capabilities: CQ-Drive, CQ-Knowledge, CQ-Strategy, and CQ-Action.
Ang et al. (2007) stated that CQ examines particular aspects in intercultural contexts.
This multidimensional construct includes four dimensions of cultural intelligence:
International and Intercultural Management Challenges 693
(a) metacognitive – “an individual’s cultural consciousness and awareness during
interactions with those from different cultural backgrounds” (Van Dyne et al., 2008,
p.16), also referred to as CQ-Drive;
(b) cognitive – “an individual’s cultural knowledge of norms, practices, and
conventions in different cultural settings” (Van Dyne et al., 2008, p.16), also referred to
as CQ-Knowledge
(c) motivational – “an individual’s capability to direct attention and energy toward
cultural differences” (Van Dyne, et al., 2008, p.16), also referred to as CQ-Strategy, and
(d) behavioral – “an individual’s capability to exhibit appropriate verbal and nonverbal
actions when interacting with people from different cultural backgrounds” (Van Dyne,
et al., 2008, p.16), also known as CQ-Action.
Context and purpose of the research
The research is structured based on the cultural intelligence theory. Cultural
intelligence was first introduced in 2003 and is defined as “an individual’s capability to
function and manage effectively in culturally diverse settings” (Ang & Van Dyne, 2008,
p.3). Delving further into existing literature and research, the authors did not identify
at this point literature related to the transferability of the CQS across cultures in
Eastern Europe.
In this paper the authors discuss the cross-cultural transferability of the Cultural
Intelligence Scale (CQS) in the Eastern European context, looking at the Republic of
Moldova and Ukraine examples. On this basis, the authors explore the relevance of the
CQS for leadership and management practices and the analysis of this concept in the
context of the economic developments and transition processes occurring in the
region. The adaptation of CQS in Ukrainian was initiated as part of a research project,
which commenced in 2012 as a joint US-Ukraine Project of the Department of
Organizational Leadership at Indiana Wesleyan University (Indiana, USA) and the
Institute of Sociology, National Academy of Sciences of Ukraine (Kyiv, Ukraine). The
Cross-cultural interaction and processes have not been reflected and analyzed in
Ukraine through the lenses, terms, and definitions of “cultural intelligence” as defined
above. At the same time the “cultural competence” concept, which is understood as a
derivative of “cultural education/awareness” and “cultural sensitivity”, is widely used
by Ukrainian sociologists (Ruchka & Kostenko, 2002, 2008, 2010).
The research was then expanded to the Republic of Moldova in 2015 motivated by the
fact that such a research might bring more details, relevant from a leadership and
management perspective, to light; these could be considered for future research but
also for practical business use, development of specific applications for international
companies, universities, and other stakeholders in this Eastern European region in
general.
Expanding the application of the Cultural Intelligence Scale to Moldova has allowed an
interesting comparison to the Ukrainian study results, as there are many similar
factors between the two countries (political heritage, geopolitical factors, similar social
structure development in the 20th century, etc.), while at the same time many
differences (size of the country, language/culture, economic factors, etc.) that
underline the specifics of the region.
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In a context of constant economic, cultural and political change but also of limited
resources, the need for researching cross-cultural interaction and cultural intelligence
potential in the two countries becomes more stringent. Cultural intelligence abilities
represent a prerogative for a regional, European and globally competitive
entrepreneurial activity in various fields. This includes an understanding of how
Moldovans and Ukrainians see the world beyond their borders, and how well equipped
they are to successfully interact with other cultures.
Thus one of the purposes of our research was to study / test the understanding of
“cultural intelligence” in the two countries, as part of the broader Eastern European
region. It is worth mentioning that there has been no other testing to date to determine
whether the CQS is transferable to countries in Eastern Europe.
Methodology
The specific objectives of the cultural intelligence research project were aligned to the
general goal of understanding the cultural intelligence trends in both Moldova and
Ukraine.
The specific objectives were to:
- translate and adapt the CQS scale to Ukrainian and respectively Romanian languages
and Ukrainian / Moldovan context;
- identify the precise understanding of the 20 items of the cultural intelligence scale
(CQS);
- test the translated instrument in a pilot study;
- measure cultural intelligence in Ukraine and Moldova, applying the cultural
intelligence scale to national representative samples.
The study was conducted in three phases: a qualitative exploratory phase, a pilot phase
and the final quantitative national study of cultural intelligence in each country.
The purpose of the first qualitative phase of the research was to achieve versions of the
English instrument, the cultural intelligence scale, into Ukrainian, Russian and
Romanian that are conceptually corresponding in the two countries/culture (Ukraine
and Moldova). This means that the instrument should measure the same concept
beyond translation. For this purpose, next to the forward translations the researchers
have also applied the back translation technique to secure an accurate local version of
the instrument. Both forward and back translations were conducted by local expert
partners from the two countries. Back translation is a procedure of translating a
research instrument by a team of professional translators and experts, who interpret a
document which was previously translated into another language back into the
original language (van Raaij, 1978).
The adaptation of the instrument phase was continued with the organization of
cognitive focus groups, the goal of which was to identify the personal understandings
of the instrument's content, but also general cultural patterns that will help define the
understanding of cross-cultural interactions. In both countries, the focus groups were
organized in urban and rural areas. Thus the authors have ensured that the adaptation
and translation of the CQ scale were accurate and adapted to the local cultural and
linguistic requirements. The focus groups have allowed the collection of relevant
International and Intercultural Management Challenges 695
information on how the local population interprets the main concepts of the study,
which has contributed to the adaptation of the instrument in the respective languages.
The second phase of the study included a quantitative pilot study. Following the
adaptation of the CQS, the instrument was randomly tested among a student
population from the various Moldovan universities in their 1st, 2nd, 3rd (or 4th and
5th) year of studies (BA level), and 1st and 2nd years of master studies. The pilot
application of the instrument was based on a random sample, covering 250
respondents. In Ukraine, the second phase has involved the pilot testing of 341
students from Taras Shevchenko National University in Kyiv, Ukraine. The participants
were students ranging from the first to the fifth year of studies, enrolled in a wide
range of degree programs. Both versions (Russian and Ukrainian) were randomly
distributed, as all students spoke both languages fluently.
The final phase of the research was the national representative measurement of
cultural intelligence, applying the adapted CQ scale. The goal of the third phase was to
apply the CQS instrument on a nationally representative sample of 1200 people in
Moldova and 1800 participants in Ukraine. The makeup of this sample has included a
diversity of ages and education, and different language groups, and has observed the
gender balance. All the different regions of each country were represented as well.
Additional demographic information was gathered as well. Data were collected in face
to face interviews based on the CQ scale questionnaire.
Results and national specifics
Though each stage of the research has identified relevant and insightful data about the
understanding of cross-cultural interactions in the respective countries, in this paper
the authors consider only on the final national results in the two countries, in an
attempt to compare the main results. The findings are interpreted in the context of
specific country and region realities. Thus first the authors see relevant to provide an
overview of the country background and underline relevant political, social and
economic aspects of these societies.
In November 2013, the Moldovan Government initialed an Association Agreement with
the European Union (EU), advancing the coalition's policy priority of the EU
integration (WB, 2013), which was approved by the European Parliament in November
2014. This is the first economic and political agreement with a former Soviet Republic
after the Ukrainian crisis started in 2013.
Such positive changes might influence a direct inflow of investment. Moldova thus has
become more attractive for foreign capital investment and the business climate has
become more favorable (Popa, 2015). However, according to a Moldovan value survey
Moldovan citizens believe that membership in the Customs Union (CU) will be more
beneficial than EU in terms of employment and economic reforms (Korosteleva, 2010).
The World Happiness Study puts Moldova in the 53rd position in its ranking (Ukraine is
on 87, Russia on 68). In addition, Moldova has the highest happiness rate among other
post-Soviet countries (World Happiness Research, 4).
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Migration is a major phenomenon in Moldova and has a profound impact on the
country's demographics, social structure, and economy. The Moldovan Intelligence and
Security Service (2013) has estimated that 600,000 to one million Moldovan citizens
(almost 25% of the population) are working abroad and the number is growing.
Moldova is a small country, however, historically, this Eastern European republic has
undergone extensive political and structural societal changes, and due to its
geopolitical position the statehood of the country was continuously endangered. The
country gained its independence in 1991, after the breakup of the Soviet Union.
However, its political and geopolitical course was not always clear. Challenged by a
Soviet "frozen conflict" within its borders (Transnistria), Moldova is also challenged by
a lack of resources -- although many studies refer to the fact that human resources
represent the strongest asset of the country. Due to the current geopolitical crisis in
the region (the ongoing Ukraine-Russia conflict), Moldova has tried even more to
strengthen its position through the Association Agreement signed with the EU.
Nonetheless, internal political forces have divided the country, with some supporting a
stronger link with Europe, while others advocate for a stronger pro-Russian/ CIS
relationship.
Moldova is on the border between East and the West, and cross-cultural research
needs to take into consideration the current developments Moldova is facing, including
a wave of investments and also increased intercultural ventures at both private and
public levels.
Analyzing the averages of all four dimensions of CQS (Metacognitive, Cognitive,
Motivational, and Behavioral) in Moldova, the authors have observed that the cognitive
dimension has the lowest score among the four dimensions - 3.65 and the motivational
dimension has the highest score of 5.07. The CQS scale is measured on a 1 to 7 Likert
Scale, 7 being the highest score.
Among the 20 items of the CQS (see annex 1) the lowest scores were registered for
item COG2 I know the rules (e.g., vocabulary, grammar) of other languages: 3.47 and the
highest scores were registered for item MOT5 I am confident that I can get accustomed
to the shopping conditions in a different culture: 5.31. This can be interpreted by a very
intense mobility of the Moldova population and migration to the neighboring
countries, to Europe as well as to the Russian Federation.
Analyzing each dimension separately, it was observed that within the metacognitive
dimension the item describing best the cross-cultural abilities of the respondents is
MC2 I adjust my cultural knowledge as I interact with people from a culture that is
unfamiliar to me. For the cognitive dimension, the item that has scored the highest in
the national study is the COG1 I know the legal and economic systems of other cultures.
The motivational item MOT4 I enjoy living in cultures that are unfamiliar to me has
scored the highest on the CQ scale, having an average of 4.69, is which substantially
different from the other items scores. Reviewing these findings in the context of the
current societal changes in Moldova, they can be explained by the extreme migration
the country is confronted with.
International and Intercultural Management Challenges 697
And finally, the behavioral dimension did not present any substantive differences
among the results per items within this dimension, all of them being placed between
4.73 and 4.92 scores.
The collected data in the Republic of Moldova, as well as in Ukraine were
representative at the national data. Below is the Moldovan example sample
distribution.
GROUP DISTRICTS
Briceni, Edinet, Ocnita and rural
1 Donduseni
(Northern Moldova) urban
Soroca, Drochia and Floresti rural
2
(Northern Moldova) urban
Mun. Balti, Falești, Glodeni rural
3 and Sangerei
(Northern Moldova) urban
Orhei, Rezina, Soldanesti and rural
4 Telenesti
(Central Moldova) urban
Chisinau Municipality rural
5
(Central Moldova) urban
Anenii Noi, Criuleni, Ialoveni rural
&
6
Straseni urban
(Central Moldova)
Ungheni, Calarasi and rural
7 Nisporeni
(Central Moldova) urban
Basarabeasca, Hancești, rural
8 Leova & Cimișlia
(Central Moldova) urban
Căușeni, Stefan Voda rural
9
(Central Moldova) urban
UTA Gagauzia rural
10
Figure 1. Map of Moldova and sampling (Southern Moldova) urban
distribution per regions Taraclia, Cahul, Cantemir rural
11
(Southern Moldova) urban
*The Moldovan Eastern region Transnistria was not included in the study due to difficulties in collecting data in
the region.
The cognitive dimension has received the lowest score among the four dimensions,
which leads to the conclusion that the cognitive items are describing the least the
capabilities of the respondents.
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Figure 2. CQ Dimensions average - national CQ measurement in the Republic of Moldova
In a globalizing world, the importance of intercultural competencies becomes more
and more relevant and the need for cultural intelligence continues to rise.
Particularly interesting in this sense is another former Soviet republic, Ukraine. As in
the case of Moldova, Ukraine too has transitioned from a communist system to a new
form of social, political and business leadership, based on the capitalistic model, but
not exactly similar to it.
Ukraine has gained its independence after the dissolution of the USSR, in 1991,
however, true independence did not occur due to a lack of understanding of how
democratic political systems function (Johns & Buko, 2013). Corruption has spread in
the political and social systems, spreading to all levels of society, leading the country in
2004 to the Orange Revolution. “Social, economic and cultural pattern of Ukraine is
changing” (Johns & Buko, 2013).
Ukrainian society, undergoing important political and social changes, and due to
political and social restructuring in the light of the Euromaidan Events and Crimean
Crisis in 2014, is facing a change of social paradigm. Having the same recent history
background as Moldova, Ukraine is different in size, geopolitical options, social
structure and economic potential. Though the study was initiated before the
Euromaidan events, the potential of signing the Ukraine–European Union Association
Agreement but also the dichotomy that has been created within the country
concerning geopolitical options, brings to light many aspects concerning intercultural
contacts and communication in the current context. These events will allow the
country to have a closer cooperation with the EU as a strategic political partner, while
the country will have to position itself in the global market and face constructively the
communication with Russia.
These events lead to more intercultural exposure, cross-cultural communication and
more frequent interaction with other cultures and thus make the study and application
of cultural intelligence more relevant for this country.
International and Intercultural Management Challenges 699
The CQ research in Ukraine was conducted before the Euromaidan events, a fact which
has added an additional complexity to the analysis of the results. In Ukraine, similar to
Moldova, the lowest scores were observed in Cognitive CQ. These results, in both
countries, could be explained by the historical background; the population of the
former Soviet Union has experienced over 50 years of traveling restrictions,
information restriction, different information sources, including books, were banned.
The lowest scores related to the Metacognitive CQ suggest that over 30% of the total
respondents did not feel they were conscious of their cultural knowledge. In the
Behavioral CQ, many (about a third) disagreed that they changed their verbal behavior,
as well as non-verbal behavior. These results can be explained by the lack of direct
exposure to other cultures.
A more detailed review of the demographic variables the study looked at - gender, age,
education, region of residence - in both countries resulted in several findings. One clear
finding the results revealed is that gender differences were not statistically significant
in both countries, though the expectation was for women to have a higher cultural
intelligence than men. Both men and women answered all the questions in relatively
similar ways. In the Ukrainian study negative correlation between older participants
and the respondents’ agreement level with the 20 questions. Thus the older the
participants, the less likely they were to demonstrate “cultural intelligence” as
measured by the CQS instrument. This finding can be explained by the fact that older
Ukrainians have been less exposed to foreign influences during their lifetime, they
have had fewer travel opportunities abroad. In Moldova, however, there are no
particular differences between the different age groups.
The education variable has shown a positive correlation between the higher level of
education and all cultural intelligence items of the scale. The scores were particularly
high for the MOT 4 I enjoy living in cultures that are unfamiliar to me an item from the
scale. A causal relationship is not automatically implied here, but it does open new
avenues of research, looking into why this positive correlation exists.
In the Ukrainian study, considering the specific of the country, respondents were also
invited to identify their primary language to use in the questionnaire: Russian or
Ukrainian. Relevant differences were identified in the assessment of the responses of
the two groups. The Russian language speakers have registered in about two-thirds of
the questions high levels (self-reported) of cultural intelligence. Nonetheless, the
results show that in the questions that have measured the ability to change verbal and
non-verbal behaviors in cross-cultural encounters Ukrainian speakers have had a
higher score.
The Ukrainian results were also tested against the four regions in Ukraine: Center,
South, East, and West. Although these geographical regions are delimited precisely,
relevant differences were identified between the southern part of the country and the
other three regions. Generally, the means of the central, eastern and western parts
were lower than for the southern region. “As the south region has the highest
percentage of Russian speakers, it might be expected that the findings would be similar
to the pattern observed in the language results” (Johnson & Buko, 2013).
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In the Moldovan study, additional findings were brought to light by the rural - urban
testing of the results, which have shown lower CQ in the rural area compared to the
urban one, which was explained by other variables as well, e.g. education. However,
new research potential was uncovered by the comparison of CQ data between the
western and eastern borders of Moldova. The Eastern borders regions have presented
a general 90% lower CQ on all items compared to the Western ones.
The findings from this national study in both Moldova and Ukraine demonstrate that
cultural intelligence study in the region presents relevant results from a sociological,
historical and even psychological perspectives, but also leadership, management, and
capacity building ones, which are now further pursued by the authors in a more in-
depth analysis of the results.
Conclusions
Cultural intelligence becomes crucial in the selection of individuals for management
and leadership purposes. The selection is more often than not based on the technical
expertise and other factors as a willingness to relocate (Kim & Van Dyne, 2011).
In this paper, the authors have discussed the cultural intelligence measurement in the
context of Eastern Europe, looking at the data stemming from the original research
undertaken by the authors in two CQ measurement studies, in Ukraine and Moldova.
Cultural intelligence implications for management and leadership are extensively
discussed and analyzed in the American and Western European organizational context.
However, a national assessment of cultural intelligence and, especially in Eastern
Europe, represents a novelty in the field. Initiating the application of the cultural
intelligence scale in Eastern Europe has contributed to obtaining results that have real
practical management and leadership implications for the training and selection of
leaders.
An important result of the analysis represents the differences among the four
dimensions, as well as the differences noted within each dimension. This outcome is
crucial as cross-cultural, intercultural communication and contact, and cultural
intelligence, in general, can represent a practical tool for managers and leaders to
apply.
References
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framework of firm-level intercultural capability. Decision Sciences, 39(3), 337-
358.
Ang, S., & Ng, K.-Y. (2005). Cultural and network intelligences: The twin pillars in
leadership development for the 21st-century era of global business and institu-
tional networks. In K.Y. Chan, S. Singh, R. Ramaya, & K.H. Lim (Eds.), Systems and
spirit (pp.46-48). Singapore: Singapore Armed Forces Military Institute
Monograph.
Ang, S., & Van Dyne, L. (2008). Conceptualization of cultural intelligence: Definition,
distinctiveness, and nomological network. In S. Ang, & L. Van Dyne (Eds.),
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Handbook of cultural intelligence: Theory, measurement, and applications (pp.3-
15). New York, NY: Sharpe.
Ang, S., Van Dyne, L., & Tan, M.L. (2011). Cultural intelligence. In R.J. Sternberg & S.C.
Kaufman (Eds.), Cambridge handbook on intelligence (pp.582-602). Cambridge:
Cambridge University Press.
Groves, K., & Feyerherm, A. (2011). Leader cultural intelligence in context: Testing the
moderating effects of team cultural diversity on leader and team performance.
Group & Organization Management, 36(5), 535-566.
Institute of Sociology of NASU (2002). Social and cultural identity and practice.
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Livermore, D. (2010). Leading with Cultural Intelligence: The New Secret to Success.
New York: American Management Association.
Johnson, R.B. & Buko, S. (2013). Cultural Intelligence Scale (CQS): testing cross-cultural
transferability of CQS in Ukraine. Study of Changing Societies: Comparative and
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Johnson, R.B. (2014). Testing cultural intelligence of Ukrainian students. Economic
Noble Visnyk, 1(7), 171-178.
Kim, Y-J, & Van Dyne, L. Cultural Intelligence and International Leadership Potential:
The Importance of Contact for Members of the Majority. Applied
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Management, 31(1), 20-26.
Van Dyne, L., Ang, S., & Livermore, D. (2010). Cultural intelligence: A pathway for
leading in a rapidly globalizing world. In K.M. Hannum, B. McFeeters, & L.
Booysen (Eds.), Leading across differences (pp.131-138). San Francisco, CQ:
Pfeiffer.
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intelligent leaders through international service experiences. Paper presented at
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Appendix. The Cultural Intelligence Scale (CQS)
Read each statement and select the response that best describes your capabilities.
Select the answer that BEST describes you AS YOU REALLY ARE (1=strongly disagree;
7=strongly agree)
CQ Factor Questionnaire Items
Metacognitive CQ:
MC1 I am conscious of the cultural knowledge I use when interacting with people with different
cultural backgrounds.
MC2 I adjust my cultural knowledge as I interact with people from a culture that is unfamiliar to
me.
MC3 I am conscious of the cultural knowledge I apply to cross-cultural interactions.
MC4 I check the accuracy of my cultural knowledge as I interact with people from different
cultures.
Cognitive CQ:
COG1 I know the legal and economic systems of other cultures.
COG2 I know the rules (e.g., vocabulary, grammar) of other languages.
COG3 I know the cultural values and religious beliefs of other cultures.
COG4 I know the marriage systems of other cultures.
COG5 I know the arts and crafts of other cultures.
COG6 I know the rules for expressing non-verbal behaviors in other cultures.
Motivational CQ:
MOT1 I enjoy interacting with people from different cultures.
MOT2 I am confident that I can socialize with locals in a culture that is unfamiliar to me.
MOT3 I am sure I can deal with the stresses of adjusting to a culture that is new to me.
MOT4 I enjoy living in cultures that are unfamiliar to me.
MOT5 I am confident that I can get accustomed to the shopping conditions in a different culture.
Behavioral CQ:
BEH1 I change my verbal behavior (e.g., accent, tone) when a cross-cultural interaction requires
it.
BEH2 I use pause and silence differently to suit different cross-cultural situations.
BEH3 I vary the rate of my speaking when a cross-cultural situation requires it.
BEH4 I change my non-verbal behavior when a cross-cultural situation requires it.
BEH5 I alter my facial expressions when a cross-cultural interaction requires it.
© Cultural Intelligence Center 2005. Used by permission of Cultural Intelligence Center. Note. Use
of this scale granted to academic researchers for research purposes only. For information on using
the scale for purposes other than academic research (e.g., consultants and non-academic
organizations), please send an email to cquery@culturalq.com
International and Intercultural Management Challenges 703
THE ROLE OF AN ENTERPRISE CULTURE FOR RISK MANAGEMENT
Elvira KUHN
Trier University of Applied Science
Schneidershof, 54293 Trier, Germany
elvykuhn@aol.com
Abstract. Nowadays, the business environment is a highly changing one. The complexity
rises in relation to economics, organization, and technology. To be successful, each
enterprise has to know and to manage its opportunities and risks. In this paper, we will
focus on cultural risks related to management and leadership, with the notion to stay
successful on the free market. According to Henry Ford, success arises when having
exactly the capability that is asked for in the moment. Therefore, an enterprise has to be
organized agile, called AOE. Agile enterprises have trust-based relationships with their
customers and suppliers. Human productiveness is the essential resource for agile
enterprises, not the technology, not the work, not the equipment. AOE handle changes
and challenges in a dynamic and energetic fashion. In order to be able to cope with these
new realities, an AOE makes sure that the employees have a sense of safety and
appreciation at work. The management of an AOE establishes possibilities for the staff to
do the work without anger in case of mistakes. There is a need to feel safe from workplace
bullying or inadequate pressure. Therefore, communication and cooperation are the
bases for a comfortable workspace – more so than corporate identity or financial /
seasonal / promotional ways of motivation. Educating a specialist or finding proper team
member costs money and time if you even find them on the market, so the management of
an AOE has to avoid the departure of team members. The favored culture within an AOE
has to eliminate bullying, gossiping, and other kinds of illicit behavior - but also to
establish teams that are diverse in capabilities and personalities to aid one another and
respect everybody. We have to take into account that there won´t be enough time to settle
all details and changes in writing, nor to be angry if something is going differently than
planned. To capture opportunities there is also the need to think about improvement
continuously. All these necessities have to be configured for a long-time perspective. The
main question is how we can support all these upcoming changes within risk
management. In our paper, we will discuss the content of the guidelines, the formation
and changing processes to adapt guidelines, methods and techniques, the strategies of
communication and the necessity for the management to exemplify these values within
their own life. At last, we will show the expected impacts on enterprises, on human beings
and on society.
Keywords: risk management; antifragility; agility; enterprise culture; brand flow;
changing processes.
Introduction
It is not enough to recognize changes and risks correctly, but also necessary to decide
how to act and react as written in Kuhn and Voigt (2010). Decisions have to be realized
in real time not only discussed. This provides a behavior pattern. In conclusion, we see
that risk management does not only mean to identify, analyze (e.g. in regard to costs of
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damage or probability of occurrence) and evaluate the risks as seen in Auckenthaler
and Gabathuler (1997) and in Spedding and Rose (2008). To counteract risks
appropriately the responsibility and competence within the enterprise have to confirm
as Kuhn (2010) and Auckenthaler and Gabathuler (1997) considered - distinguish
between three levels: cultural risks, strategic risks, and operational risks.
Within an agile enterprise, the cultural risks are minimized by introducing guidelines
for the behavior within and without the enterprise. Therefore, the enterprise has the
capability to be quick, flexible, active and adaptable to the market if changes happen.
These guidelines are also called enterprise or organizational culture. This means as
considered by Hofstede (1990) “Organizational Culture is defined as the way in which
members of an organization relate to each other, their work and the outside world in
comparison to other organizations. The Dimensions enable a tangible alignment of
Organizational Culture and Strategy“. In our paper, we will discuss the content of the
guidelines, the formation and changing processes to adapt guidelines and give long-
time orientation for staff members.
Approach
To figure out the best possible individual enterprise culture, - in detail to form the
behavior of team members within the enterprise and to adapt the culture if there is a
need, to obtain the result to minimize the risks and to augment the chances we choose
this approach.
Figure 1. Methodology to see the effects of an enterprise culture for risk management
At first, we will describe the tasks of each sub-process of the risk management and the
needed knowledge, which includes the needed skills, capability, will, and
responsibility. After this, we discuss the influence of organizational culture for each
step of the process. Then we describe the effects of an enterprise culture for the whole
process, as well as methods and techniques to augment the effects concerning the
enterprise culture. Finally, we discuss the necessity of changing processes to
sometimes adapt the guidelines including a description of these changing processes
themselves. At last, we will show the expected impacts on enterprises, on human
International and Intercultural Management Challenges 705
beings as well as on society by having such enterprise culture as we propose. The steps
of our approach are shown in Figure 1.
Description of sub-processes of Risk Management
The underlying definition of our approach for Risk Management is that it is a process
separated in three sub-processes as we have determined with the help of the Jacobson
method. Each sub-process has a name and only one start point and one end. Our sub-
processes are called at first “Identify risk from first signals to description”, second
“Analyze and evaluate risk from description to ultimate causes”, and thirdly “Act and
React from causes list to establish measurements”. Now we describe each subpart of
the Risk Management process in the aspect separation you have seen in Figure 1.
Identify risk from first signals to description
This sub-process can be divided in the tasks “Sensitization to recognize that something
is going on”, “Finding out the rules of the talk about this detection“, “Description by the
way or writing to somebody who will be concerned”, “To ensure the right steps for
handling this identified risk in the future”.
Therefore, the necessary knowledge for this sub-process knows the desired strategies
and future position on the market, about the ergonomic workplaces and interest to
recognize technical possibilities to augment the performance of the staff, knowledge of
who the right contact person for a specific situation is. Based on this knowledge the
team member may be able to recognize the exigency to change his own handling. Social
and psychological knowledge augment the possibility for management to recognize i.e.
capacity overload or underload. No or not enough communication between staff,
fatigue or boredom is very high-risk factors within an AOE, so the necessity for
detecting these is given.
Skills: For the first step in this process the actor needs at first methodological
competence. There is a need for a high personal competence with characteristics like
personal responsibility, decision-making ability, and the ability of self-reflection,
creativity or motivation. However, the mobilization competence, as well as the transfer
competence, is needed, too. This means in this case especially client - and staff
orientation, the use of knowledge and of information as well as the disposition to
initiate changes. Thirdly, we need social competencies like empathy, a disposition to
communicate or to cooperate.
Capability: The person has to be sensible of how they can talk about the identified risk
and to recognize in which way something has to be handled – privately or publicly,
unofficially or officially, hidden or open, in writing or verbally.
Will: Approach to support (depending on the culture) everybody’s freedom to say
whatever him or her desire to help the economic wellbeing or social wellbeing. In
addition, there has to be the will to change and advance existing views. Sometimes it
will be hard to “survive conflicts”.
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Responsibility: The responsibility is often handled in different ways: by the whole staff
or only by the management, by a special person in the role of a risk manager with the
assignment to observe the environment or by a special group or by a special
department, having the responsibility to recognize the relevant changes. However,
there are necessarily many “sensors” and right interpretation sometimes happens on a
visceral level. This cannot just be postulated but also has to be lived and supported by
the right behavior.
Influences: If the Risk Management is integrated into the normal work, everybody will
see beyond the end of one's own nose. Everybody knows that their information is
important for all. An important feeling is to be on fire for the job. This has a wide
influence on observing the surrounding environment and is, therefore, the first sensing
element that there may be risk or chance for the enterprise on the market (outside
watching), there may be risk or chance for the workplaces (outside and inside
watching), or there may be risk or chance for persons (inside watching). To decide
whether there is something wrong (or a chance) for the enterprise you need a
description of strategies and future visions. This is a needed information detail
discussed with the staff, written down and lived within the enterprise.
Now we start with the second sub-process, called “Analyze and evaluate risk from
description to ultimate causes”.
Tasks realizing this sub-process have to analyze the surrounding conditions of the risk
described, and to classify expected or unexpected situations. Then in the next step,
there is to choose the right analyzing method, to appoint the appropriate people or
groups as candidates for locating the exact problems for reduction. After this you have,
analysis BIG DATA, to use the right method or sometimes more than one - and finish
the sub-process with describing or jotting down the ultimate causes.
Needed knowledge: To assert the effects of the enterprise’s future success you need
knowledge of methods for problem analysis, like fish-bone techniques, Data Mining,
statistics or scenario techniques. To do this, the person will also take into account
some strategic parameters, as well as the influence of behavior inside or outside the
company. To find out the effected tasks and roles within an enterprise and to list the
ultimate causes, you have to know much about the organization and the personalities
of the enterprise as seen in Mullins (2007).
Skills: To execute this sub-process, it is a need of many competencies, firstly expertise
in mathematics, in strategic management, in process management, and in human
resources management. In addition, there is the necessity, to sum up, the future
situation as well. Therefore, you have to be able to develop strategies, to analyze
situations and to communicate the situation. Skills from sociology or psychology are
welcome.
Capability: The most important capabilities are embodied in analytical skills and
operating with empathy.
Will: If you have a motivation to help your enterprise you will work in better ways and
will find more possibilities in both directions – for best case and worst case by
analyzing the situation.
International and Intercultural Management Challenges 707
Responsibility: In most cases, we find out that there are specialists in addition to the
leadership. Influences: In order to get the best result you have to be creative and apply
the methods written above. Also, please deploy experts.
Our third sub-process is “Act and React from causes list to establish measurements”.
Within this sub-process is the following tasks: To think about measurements, to
communicate the necessity, to decide the actions, to prioritize and to adapt a catalog
with measurements, to control the effects and to make sure that all of this will happen
in the best way for the enterprise. This may mean to influence the behavior of people
inside or outside of the company.
Needed Knowledge: The first step is using and exploiting the portfolio analyses, SWOT
analyses or other instruments of business economics. In addition, you need knowledge
in informatics, experience in change management as well as in coaching. To support
the change process you also need knowledge in human resource management, in
controlling, as well as in project management, as has been shown in Klimmer (2016,
p.230).
Skills like the business process model and Notation (BPMN), technological support by
workflow management systems (WFMS) as a process-oriented approach, methods in
change management like systemic organization are necessary, as well as strategic
management to prioritize the measurements.
The skills concerning the personal competence are most important to own individual
responsibility, decision-making ability, creativity, motivation, and diligence. In order to
realize the ideas materialized in measurements, the following activities- and
implementation oriented competencies are necessary: capability to analyze, capability
to judge, conventional capability, client orientation, but also the use of information,
capability of organization, capability of problem-solving, if necessary also readiness
assume a risk, initialization and fulfilling the determined changes.
Capability: Social competencies like empathy, communication skills, capacity for
teamwork, willingness to cooperate, the capacity to negotiate and reliability are
requirements to handle this sub-process.
Will: The motivation and willingness to help the company is crucial to find the best
measurements catalog. Only exemplifying an orientation towards the future (like
visions and guidelines), as well as the entries culture in addition to diagnosing
problems the sustainability of an enterprise will be given.
Responsibility: In order to influence and to change processes and human resources
you need respect. This may be based on your position in the company, but also it is
dependent on your personality.
Influences: The agreement with all actors, watching the problems, recognizing the
necessity of the chosen measurements, is very important to be successful. In addition,
internal or external change agents to aid the staff members affected by changes will be
helpful.
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Effects of an enterprise culture for the whole risk management process
Before we can discuss the effects an enterprise culture for the whole risk management
process can have, we will start with a description of our understanding of an
enterprise culture.
We follow the definition of an enterprise culture seen in Hofstede (1990):
“Organizational Culture is defined as the way in which members of an organization
relate to each other, their work and the outside world in comparison to other
organizations. The Dimensions enable a tangible alignment of Organizational Culture
and Strategy. The term culture refers to the typical way of behaving within an
organization or in society as a whole. An organization therefore with an enterprise
culture is one where people are imaginative and creative, rather than being reluctant
to take risks” And in Businesscasestudies.co (2016) we found this description: “An
enterprise culture is made up of enterprising people who are prepared to challenge
existing ways of doing things, and to come up with new ideas and solutions to the
benefit of society as a whole. The term 'thinking out of the box' refers to being able to
think beyond the straightjacket of existing ways of tackling problems or arranging
activities. It requires some form of original thinking.” There exist different cultural
models like the Organizational Cultural Model - also called Hofstede’s Multifocus
Model-, 3-levels-of-organizational-culture from Schein (2013). In Mullins (2007, p.808)
we found a contrary definition of an organizational culture as “the collection of
traditional values, policies, beliefs, and attitudes that constitute a pervasive context for
everything we do and think in an organization.”
We do not think that this is the right understanding in view of organization change. It
is rather the need and means to seek for a better way of cooperation with the focus on
speed and not to having a collection of traditional values. As we have considered in our
risk management process shown before, all these terms – creativity, arranging
activities - are important aspects of personality in the whole staff. Guidelines are to be
defined and to be communicated to achieve all of what we have shown above. The
guidelines should be considered in every situation, private and professional and not
only written on paper, not only by management, devised in a hidden corner. Rather, it
is necessary to work together on the guidelines. So not the rites, ceremonies,
organizational myths as seen in Schein (2013) are the triggers for a culture to support
a risk management procedure but the organizational values expressed through
“unwritten rules of the road” as well as through explicit description taking into account
the 4 Core Cultures: Control, Collaboration, Competence, Cultivation from Schein
(2004), Schneider (2000) or the six dimensions from Hofstede (1990): “Means-
oriented vs. Goal-oriented, Internally driven vs. Externally driven, Easy going work
discipline vs. Strict work discipline, Local vs. Professional, Open system vs. Closed
system, Employee-oriented vs. Work-oriented, Degree of acceptance of leadership
style, Degree of identification with your organization”. With the values of these
dimensions, you can achieve the needed agility for AOE. The less control, self-
organized teams, skills and qualification, a lot of confidence, to talk things out as well
as a familiar atmosphere are the most promising values here as named by Schneider
(2000).
Therefore, we chose a mix between collaborative und cultivation cultures, whereat the
cultivation culture predominates. By acting in such away the effect will be that staff
International and Intercultural Management Challenges 709
members are interacting more trustfully. They have a high responsibility and they
decide by themselves what to do. The authorities arise from the competencies. That´s
why everybody respects the leadership. The leader is like a mentor, he motivates and
supports the staff, he is seeking for conflict resolutions and he clears the way for
changes. Therefore, the effects for the risk management are that the procedure
advances in an open atmosphere, and the decisions are made corporately as
demonstrated in AOE-Services (2016). Beedle (2015) emphasized on the following
characteristics of a truly agile organization: “Management pyramid is inverted, greater
liberty and freedom to accomplish the task at hand, constant learning, knowledge
creation and knowledge sharing, a more enjoyable and humane work environment, a
hyper-productive cooperative work mode, emergent planning, architecture and
requirements, new values that generate a cooperative culture” and also he sees the
augmentation of the quality of life. Cottmeyer (2011) suggested a list of patterns that
he has observed across organizations, which are essential for success. We conclude
that such an enterprise culture is necessary for the risk management process
described above.
Methods and techniques to enhance the effects
As we have shown the effects of an enterprise culture are capable of improving the
success of the risk management process. For increasing the effects, we have found
some methods and techniques in Schein (2004), and special methods for the strategies
of communication as have been shown in Schneider (2000), Happ, Kuhn, Maier and
Schladt (2015), Drucker (2014): As we have considered we want to concentrate on
process changes and the risks concerning these. Many staff members are involved.
Shared projects across all teams for changing company processes are introduced.
Organization of the risk management process within AOE will be established similar as
in agile methods like Scrum, with one manager promoted by all employees; authorities
remain in the background during prioritization in phase 3 of our risk management
process. The staff is not only so motivated but also on fire for their company. We
understand brand management as to giving everything at work while feeling
exceptionally well by doing so. Supporting factors are as follows, seen in Absolventa
(2016) and in Mannhardt (2011): Comprehensive information about goals and the
accruing tasks, information about the relevance of internal and external contact- and
relationship situations, development of acceptance in the teams, establishing a frame
of relations. With the help of personal training, the education of psychosocial
competencies will be enforced with the goal to have relationships with minimal
conflict. In addition, there is no need to feign to be somebody you are not. The personal
management facilitates the staff members and does not ignore the psychical
constitution. The personal interaction culture is essential for the enterprise. Without
interaction no feedback is possible. As a result, the needed personal culture is working
and handling issues without anger, uncertainty or beeriness. The biggest obstacle in
the modern business environment is the slowly ever increasing pressure either self-
inflicted or deriving from bad management. In addition, we have found ACCA (2012)
that decisions should not be based upon the personal interests of the decision maker.
In addition, it is necessary to give people the means to accurately access the own
capabilities, allowing them to act in a self-confident fashion. Only then we are capable
to rapidly respond to unexpected challenges, events, and opportunities. Risk friendly
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people are always willing to learn, no matter what they need to take advantage of new
opportunities. The offensive change is the essential core of any agile enterprise.
Therefore, we have a look at what is named in their culture. Here we find the need for
trust-based relationships with their customers and suppliers.
Agile enterprises are central human productive resources, not the technology, not the
work, not the equipment. The necessity of having a good feeling during the work is
given. There is a need to have a home, a family, to feel safe, no workplace bullying and
no pressure. Communication and cooperation are necessary – we are seeking a feeling
as comfortable as a home, more than corporate identity, more than monetary
stimulation, or other secondary motivations like more holidays, better support of
family. And also it is necessary to concentrate different capabilities in one team, to aid
one another and respect everybody. Today there is no time to be angry if something is
going awry. This is the subject of personal management. Bonds between company and
employee can be created on multiple levels, enabling a trustful, responsible and with
the feeling of freedom of one´s own initiative entrusted work environment. In
conclusion, we have found out many possibilities to augment the effects of risk
management by leader style, clear communication of vision and strategies, both being
kept volatile. Common decisions on chances and risks and follow-up measurements to
realize these, transparency of internal and external communication flow, respect,
common values, self-oriented groups with high responsibility, waiving of
micromanagement are the foundations for a successful risk management.
Discussion
In order to initialize the risk process as well as its self-changing faculties, you need
personal competence, an appreciating and safe workplace and a well-functioning
Communication Flow.
Changing processes to adapt guidelines
Take into account that changes are necessary for the enterprise culture, but not as
often as the environment will change. If you monitor the risk management and you
determine modifications for it, it might be that instead of merely improving the tasks a
rectification of the risk culture itself is useful. Sometimes you can interpret the risk
response of the management to make better judgments concerning intolerance and
risk appetite. A risk response may be avoiding, accepting, reducing, or sharing risk as
seen in Happ et al. (2015). As we have shown, we can establish within enterprise
culture that the management is backing every team member all the way. That´s why a
control of the enterprise culture is also necessary to ensure the best risk response is
carried out for each case.
An appreciating and safe workplace
If you find these conditions at your workplace: To work without anger or fear, to feel at
home, no overload or upload, then you can work with pleasure. With the intent to
uphold this feeling you may be more poised to avoid or reduce risk or if necessary to
take a chance or risk. In addition, you gain ground for the advancement of each and
International and Intercultural Management Challenges 711
with this also learns the handling of chaos instead of only following rules exactly. From
this, it follows that the well feeling cannot be decreed but must be lived.
Communication Flow
The right Communication Flow as considered by Kuhn (2001) is essential to find
competent help in an unknown situation or to find the right and actual information to
decide in real time how you to act or to react. But the handling will base on the vision
and the plans of an enterprise. The construction of measurements and the realization
will follow the enterprise culture as well as the inclusion of the environment. This
means to include all points of view dealing with business plans and the orientation
towards relationships rather than transactions for controlling the changes.
Easy adaptation to new situations is only possible by the team itself if the environment
is considered and contains decision criteria for the strategy, measures, situations and
possible behavior. The support by the information technology minimizes the problems
when coordinating changing processes. Every member of the team gets to know about
occurring changes at the same time and their attention is drawn to changes in the
certain processes. In Happ et al. (2015) we speak about the necessity of common
understanding for changes and an open, fair and cooperative communication, which is
the most important way of interaction. We deal with the direct and personal way of
communication as a form of socialization. Also, the transportation and the way of how
the communication acts within an enterprise are dependent on the enterprise culture
as seen in Happ et al. (2015, p.102). There may be a communication flow between chief
and team members in a direct or indirect way, open or hidden, restrictive or
cooperative. The Manager can determine the time and date and room, he may give the
order to come to his room at a certain time or he always lends his ear to the teams, he
gives actual information to the team or not. All of this should be fixed in the enterprise
culture.
Personal competence
As we have shown above we need as personal competencies the capability to analyze,
to evaluate, to create concepts, to organize, all these in the sense of enterprise and
oriented towards clients. Also the use of knowledge and information, the capability to
solve problems, the capability to take on risk as well as the will to initialize, and to
realize changes are necessary. The disposition to cooperate, to communicate, and to be
negotiable are the conditions to survive conflicts. When recruiting staff you have to
look to these characteristics.
Expected impacts on enterprises
All processes are designed in the sense of enterprise. The staff is more than satisfied, it
is happy and willing to risk something if necessary. The enterprise culture will grow up
to a control instrument without forces to obey. Therefore, the impact on the enterprise
of having an enterprise culture is a participative change management within the
company with shared projects across all teams for changing company processes. The
management may rely on the best efforts of staff.
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Expected impacts on human beings
A special aspect concerning the impact on human beings is that employees decide how
far they want to participate. And they do it wholeheartedly. They learn to decide under
the conditions volatilely, uncertainty, complexity, and ambiguity (VUCA) without
anxiety. By doing this they are burning for their company and subsequently they are
perfectly happy. They work liable and produce with their work a very high quality.
Expected impacts on society
And finally yet importantly the impact on society is happiness and as a result an
improved health. The quality of life augments. As shown in a study of OECD (2015), the
top quality of life factor is health. It is conjecturable that the people, who are used to be
responsible for all what they do and they have learned to communicate and to
cooperate, also use these capabilities in leisure time. In consequence, living together
will be easier.
To work within an enterprise all of the involved people have to help to fight against
risks and to seize chances. This is an iterative process and not strictly a serial process.
One task can influence another.
Conclusions
By thinking about the work behind the risk process management and by discussing the
needed knowledge, needed skills, capability, will and responsibility we could show the
expected impacts on enterprises, on human beings and on society. An enterprise
culture influences the success of each risk management. An enterprise culture has to
contain guidelines about the handling of cooperation organization, the “freedom” of
team-decision as well as vision and missions of a company and give long-time
orientation for staff. It is essential to have team members with social competencies,
with courage to communicate the identified risks, own empathy and have apart on own
knowledge. Change the management is the device. Changes can have many effects. The
butterfly effect means that small causes can have large effects. The butterfly effect
leads to the implementation of chaos theory in lead management recognizing that a
small change can result in large effects. In changing the degree of identification with
the own organization the management of an AOE can receive responsible, resolute,
liable team members who do more for their work than they have to do or management
expects. The management has to carry out freedom of decision in line with vision and
strategy for each team member, in the case of mistakes all members can learn from this
situation. Surrounding conditions are having a team oriented organization form,
establishing open discussion platforms, a well-functioning communication
management, and well-functioning information flow to make sure that all members
have actual and relevant information in case of decisions. By doing this each individual
person – private or by working -, the team and at last the society will have a better life
based on wellbeing and more healthy people. Constraints are giving an order without
explanations, outside of guidelines, outside of known strategy plans, outside of well
understanding reasons.
International and Intercultural Management Challenges 713
By helping the staff to feel at home – without any anxiety - when working the company
will be able to execute strategy faster, with more flexibility and adaptability and to stop
the loss of staff as well as to lose the readiness to assume the risk. Culture design is a
very important factor to influence these. As we have shown psychological and
sociological knowledge is necessary for the leadership. Not only the functional
qualification but also the personalities of team members are essential for risk
management. Cooperation, communication, and trust are common values. Mutual
support and mutual acceptance are alive. Success is separated in hard and soft factors.
Hard factors are economic key figures in relation to quantity or quality: Revenues,
costs, failure rate, output, the percentage of morbidity in staff, and fluctuation rate.
Low factors are criteria of satisfaction and working atmosphere: motivation,
acceptance, behavior, fairness, engagement. The soft success factors are the crucial
factors for risk management. The butterfly effect is alive.
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International and Intercultural Management Challenges 715
THE PERCEPTION OF YOUNG ROMANIAN CITIZENS ABOUT MULTICULTURAL
RISK AND SOCIAL COHESION CHALLENGES, IN ECONOMIC ACTIVITIES AND
PROJECTS
Sergiu Octavian STAN
Doctoral School in Management
Bucharest University of Economic Studies
6 Piața Romană, 010374, Bucharest, Romania
sergiu.stan@comunicare.ro
Alexandru Radu DUICU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
alex.duicu@yahoo.com
Abstract. One of the most important insights into the current global context is related to
cooperation in the workplace and in international projects with multicultural teams. The
purpose of this article is to present an analysis of the literature that deals with issues of
socio-cultural diversity within the European community; the multiculturalism of
economic activities developed in the European Union; and the challenges of human
resource diversity in projects. Readers might be interested in the sociological study
carried out in this article that shows important aspects of the perception that the young
people have, related to working in multicultural environments, as well as participating in
international projects. Recommendations that they made can be identified in the
sociological survey in which participants gave solutions for a proper development of
future programs of international cooperation that can also constitute an element of
interest to potential readers. The purpose of this research is to identify relevant aspects of
classic collaboration within organizations and in projects with multicultural teams and
to identify the main risks associated with such collaborations. The first part of the article
presents a comprehensive analysis of the literature aimed at topics such as diversity in
the European community; social cohesion in the EU; multicultural economic cooperation;
flexible HR, and other topics relevant to the construction for the theoretical grounding of
this paper. The second part is the methodological approach, aimed at achieving a
sociological analysis based on multilayered sampling attended by 101 young people from
Romania (from different regions of the country). Research questions are associated with
investigating sociological covers in six distinct areas with the related perspectives:
gender and interculturalism, education level and participation in projects, responsiveness
and willingness to engage in projects, personal development and participation in
international projects, common and specific risks related to participation in projects,
recommendations for future development. The conclusions of this article outline how
participants in a sociological survey provided answers to the themes covered by the 6
research questions.
Keywords: risk; conflict; social cohesion; diversity; multiculturalism; economic activity.
716 Strategica 2016
Introduction
Nowadays there are two major issues regarding social cohesion in the EU. One of them
is the inequality between genders, and the other one is the immigration wave. Gender
inequality was much discussed and regulated through policies but is still a sensitive
subject and relates to economic activities as well as social status (Fontainha, 2005,
p.108). Integrating the immigrants is a new challenge for all the Member States. The EU
is trying to integrate the individuals that are seeking shelter, by offering them a chance
as receiving citizenship in the near future, offering them the tools to integrate into
society, and include them into the antidiscrimination legislation (Lithman, 2010,
p.492). Another challenge is the well-known existing ethnic diversity among European
citizens. Young Europeans must be integrated into a multicultural environment as soon
as possible in order to familiarize them with a work environment that is composed of
people coming from other cultures. One way of doing this is through mobility
programs.
Diversity in the European Union communities
A community in which diversity emerges has both positive and negative effects. The
positive effects may relate to multiculturalism in the community and social
development. The negative effects are directly linked to weakening social capital.
Although the interaction between individuals may become more pronounced, the
attachment of individuals to the community or the sociability can decrease in time. At
this stage, the negative effects don’t result in social isolation, especially if the results
showed an increase in the interactions of individuals living in the same community.
The next stage is when diversity takes one more form, and that is the advantaged and
disadvantaged individuals. Disadvantaged individuals are at risk of developing
intolerance regarding diversity if they experience adverse effects that are not
controlled through policies that encourage social cohesion in diversified communities.
If individuals are not affected by disadvantage, then their tolerance for diversity may
increase (Lauren, 2011, p.85). The meaning of disadvantaged individuals relates to
economic condition and social status. Individuals with a good economic condition and
social status have bigger chances of participating in the consolidation of social
cohesion at the level of the community. At the opposite side, weak economic conditions
and no social position, tend to diminish the degree to which the individual identifies as
being part of the community. Moreover, if their situation shows no opportunities or
hope for a better future, this may push the disadvantaged individuals towards social
isolation. Although the European Union is formed of communities with big differences
between individuals from the perspective of economic condition and social status, this
inequality has not led to a weakening of the social cohesion. The negative effects of
inequality between individuals must be seen as a result of their own perception and a
problem of acceptance (Vergolini, 2011, p.210).
Through policies, social cohesion may receive the most effective support in a
community. Civil society was most discussed as another solution but the fact is that
these organizations are more effective in promoting the groups that follow the same
interests, but not effective in promoting the common interests between socially and
economically differentiated groups. In the case of social cohesion, civil society
represents the risk of excluding some groups of interests while supporting others
International and Intercultural Management Challenges 717
(Taylor-Gooby, 2012, p.382). Even though there are or not a big difference between
disadvantaged groups in a community, studies have shown that in diverse
communities there is a very weak social cohesion. Even if individuals are cohabitating
with each other, their attachment regarding the community might not be as high as in
homogenous communities. This effect does not only apply for individuals who just
moved into a diversified community but also for people that are living in a community
that has become diversified in different stages through time. For individuals who are
moving to homogenous communities, their attachment to the community is shown to
grow. Thus, even if individuals seem to cohabitate in diversified communities, it does
not mean that they are attached to that community. The changes that lead to an
increase in the level of diversity are most likely to have an effect that weakens the
social cohesion in its essence (Laurence & Bentley, 2016, pp.62-64).
On a policy level, the action seems to represent a good strategy for inclusion, but at a
social and economic level, the results remain to be seen. Besides policy, the credibility
of the EU and national institutions is important for social cohesion. The credibility that
institutions are putting effort and offering citizens an equal treatment may reduce the
perception of inequality. Thus, citizens will not be exposed to increased intolerance
due to inequality perception (Andrews, Jilke & Van den Walle, 2014, p.564). In theory,
a high level of inequality results in a low level of social capital. So the higher the
inequality is between individuals, the higher the social barriers will get between
different ethnic groups. Also, the fewer people will connect with other people because
of their low trust and hesitation to create relationships (Gesthuizen, van der Meer &
Scheepers, 2009, p.124).
Diversity and economic activities in the EU
The European Commission is well aware of the fact that a successful integration of
immigrants is just a simple matter of creating social cohesion and also economic
efficiency (Mattelart & d`Haenens, 2014, p.236). The diversity is seen as an
opportunity for economic growth and political stabilization, and not as a way to
protect against war and offer shelter from injustice. This is available for the European
communities as well as for the individuals seeking shelter because of the harsh
situation evolving in their home state. The diversity in the EU is seen as a symbol of
modernity and a future asset (Kraus & Sciortino, 2014, p.490). A very close connection
exists between social cohesion and employment. On individuals, jobs that they are
engaged in have several direct effects. Wellbeing, social relationships or involvement
in social and political activities, may all depend on the context in which their economic
activities take place (Wietzke, 2014, pp.113-114). On companies, the employee policy
must be drawn around a flexible HR in order to adapt to the international environment
and participate in supporting social cohesion. More flexibility in human resources can
provide for the companies a way to be more competitive in an environment that is
dynamic and increasing in complexity. The companies must know how to exploit the
advantages of hiring individuals from disadvantaged groups or different ethnic origins
(OECD/The European Commission, 2014, p.111).
The EU has a plan to integrate disadvantaged individuals or minorities through
providing them the opportunity to start a business. At a national level, the plan
revolves mostly around disadvantaged groups like women, elderly people, youth,
718 Strategica 2016
minorities, and persons with disabilities. In Europe, another group that must be taken
into consideration is the immigrants that seek shelter and are determined to remain
because of better life conditions. The immigrants will face much-pronounced barriers
than the disadvantaged groups. Limited knowledge regarding the way business is
done, hard access to financial resources, the complex regulatory system, no managerial
skills and no communication skills that are specific to the European business
environment, are just some of the most important factors that must be considered. One
way of providing a faster integration of the immigrants is to exploit what they have to
offer while they get to use to the European business environment and slowly integrate
into society. A strength that immigrants may possess is their knowledge related to
their country of origin and the intermediary position that they can play in generating
international trade (Sekhar, Patwardhan & Vyas, 2016, pp.64 - 68).
Studies have shown that high ethnic diversity of immigrants in underdeveloped urban
areas may have adverse effects on the economic environment, while high ethnic
diversity of immigrants in developed urban areas can bring added value, especially in
the innovative industries and companies that require issue solving abilities (Alesina,
Harnoss & Rapoport, 2016, pp.105-106). The negative effects can appear in the labor
market where immigrants occupy a big part of the grunt work so there will be fewer
positions for citizens with low skills. In the production, negative effects can appear in
the internal processes due to a low level of trust between employees and poor
communication. There can also be negative effects in consumption where the house
prices can rise because of the constant number increase of population along with the
demand. Another side effect can be the departure of local citizens and the changes in
consumer demands of certain products and services (Nathan, 2015, pp.8-12).
Diversity in projects
One way in which young European citizens (especially students) can gain experience in
multicultural activities and interact with people from other cultures is through
mobility programs. It has been shown that participants in mobility programs have
different view and motives regarding what makes them want to participate in
multicultural projects. Their motives are well related to their financial and social
levels. Souto-Otero et al. (2012) claim that in order to convince as many students as
possible, the promotion of the mobility programs should reflect opportunities for
personal development and the opportunity to create new relationships (Souto-Otero et
al., 2012, p.76). Also, they are more willingly to participate if they perceive the benefits
to be greater than the costs. Another aspect regarding the promotion of the mobility
programs is the fact that more young people from high developed urban areas are
willing to participate in multicultural programs than young people from rural areas.
Thus the promotion strategy should be changed in order to convince more young
people from rural areas to join mobility programs in order to give them the
opportunity to integrate into a multicultural environment (Perna et al., 2015, pp.184-
185). The major benefits of mobility programs are the opportunities of developing on a
personal level as well as developing on a professional level. Young European citizens
that were gone abroad with mobility programs had the chance to experience a new
system of values and at the end of their accommodation, they could return with
valuable knowledge and skills that put them in the position to think more critically
(Keogh & Russel-Roberts, 2009, p.115).
International and Intercultural Management Challenges 719
Some individuals are confronted to interact with different ethnic groups from a
younger age. In primary education, the teacher must be cautious because, even with
good intentions, it has been shown that discrimination can occur on a daily basis
without even knowing it (Miller, 2014, p.148). Studies have shown that at a younger
age, individuals interact very differently with other ethnic groups than they would
normally interact if they were adults. When two ethnic groups were put together in the
same project, they were put in the position to interact with others and no major
behavioral changes resulted. There were no adverse effects related to anxiety, neither.
Regardless of this, the individuals who were selected by the content of their motivation
statement were more opened than the individuals who were forced to participate in
the project. Following the exchange, the students became more aware of their
misconceptions and acknowledged that they should be more opened to individuals
that are different from them (Veugelers & Schuitema, 2010, pp.112-113).
Another study involving internationalization of universities trough students exchange
programs indicated the same results. There is no certainty that uniting groups of
individuals with different ethnic traits will lead to an effective intercultural interaction.
Individuals must first have the necessary skills to participate in intercultural activities
willingly (Wright & Lander, 2010, p.250). Researchers state the fact that national
identity might be the answer to social cohesion just between minority groups.
Minorities, who identify ethnically and religiously with other minority groups, tend to
create distance from individuals from the host society (Martinovic & Verkuyten, 2012,
p.1174). In projects that relate to economic activities, high cultural diversity can
predict conflict. For individuals to concentrate more on their tasks rather than conflict
resolution, it is necessary to present various negative aspects that may arise during the
implementation of the project. Also, it is necessary to introduce methods in order to
reduce the risk of conflict arousal in all phases of the project (Bohm, 2013, pp.120-
121).
Research methodology
In order to harness on the results of the theoretical research, we designed a set of six
research questions, covering diverse perspectives of the concepts discussed so far. The
first question relates to the interaction with people from different cultural
backgrounds. The next question is set to find out if young people are receptive to
participate in international programs of cooperation. Also, what is the most common
perception among young people on the role of international cooperation programs in
the development of personal and professional skills? If young people want to
participate in international cooperation programs are they identifying the same risks
with those who have already participated and have expertise in program
development? What are the main categories of recommendations for future
participation in the programs of international cooperation; formulated by young
people who want to apply in the near future.
To substantiate the theoretical concepts of diversity in the workplace, the influence of
the cultural characteristics and also the risk factors associated with international
projects, we conducted a quantitative research on a volume comprising 101
participants. The sampling of the participants in the sociological research was based on
the stratification of the participants on two levels (two-stage sampling). The first level
720 Strategica 2016
of stratification was the age; people aged up to 40 years old being included in the
target group (only 5 subjects beyond this age were kept in the opinion poll to ensure
the quality of professional experience relevant to the subject matter). The second level
of stratification was based on the selection criterion regarding past interactions with
people belonging to other cultures, at work or on other projects (assuming that only
the views of the ones that were chosen would represent a high significance level of
opinion).
In technical terms regarding how the surveys were distributed, we can mention that
following the stratification procedure were selected a total of about 210 people, from
which effectively responded to the questionnaire a total of 101 subjects. The role of the
sociological research was to identify the characteristics and risks associated with the
communication within project teams and the multicultural working environments.
People surveyed in this study belonged to one of the following categories: individuals
that interacted with people that have a different cultural background; individuals who
have worked on projects involving international cooperation; people that were
involved in international projects and are employed in large organizations that imply
cooperating with people from many cultural backgrounds.
Results
Final results of the opinion poll showed that we received answers from 53% male
participants and 47% female participants (a balance existing between the two
genders). As a first observation, we can conclude the fact that, in terms of participation
in the survey, the two different genders were not too different in their answers
regarding the subject and no significant differences could be identified. In regard to the
age of the participants at the survey, 9 of them were aged between 18 and 20 years old,
72 of the participants were aged between 21 and 30 years old, while 14 participants
were aged between 31 and 39 years old. There is a group of 5 subjects aged between
40 and 49 year old who were kept in the sample due to relevant experience in
interaction with people from different cultural environments. Statistical analysis of
data regarding the education of the participants showed that 41% of them were college
graduates, 43% were graduates with a master degree, 8% of the participants were
Ph.D. graduates, and 8% were high school graduates.
As a summary of the educational level of the participants, 92% are university
graduates (having either a bachelor, master or doctoral degree), while only 8% are just
high school graduates (having only mid-level studies). People with higher education
are significantly better represented in the sample than those with secondary
education. A first explanation would come from the fact that the interaction with
multicultural environments comes from student mobility programs as the study will
further show. Another interesting feature is related to the area of origin of the
respondents. The survey data analyzed regarding the status of origin of the
respondents revealed that 85% of them came from urban areas and only 15% came
from rural areas. The people from urban areas have a more significant opportunity of
interacting with multi-cultural environments. We cannot say that in rural areas are any
prospects of collaboration with people from multicultural environments but the
numerical perspective in rural areas is much lighter than in urban areas.
International and Intercultural Management Challenges 721
Regarding the origin of the respondents, our sociological analysis included all
developing regions but the representative factor was extremely heterogeneous. Most
people (59% of the respondents) were originated from Bucharest – Ilfov region, while
41% were originated from the rest of the regions. Due to low sampling volume, as well
as the heterogeneous distribution of the respondents, there was not conducted a
statistical analysis of opinions expressed from the perception regarding "region of
origin". Although all the respondents had experiences with different degrees of
interaction with people from diverse cultural environments, the data analysis of the
survey showed that only 53% of those that were surveyed had directly participated in
a project that involved international cooperation. It is worth mentioning here that 63%
of the surveyed individuals have a job, while the rest 37% do not currently have a job.
In the following sociological analysis, we present the results for the group of people
who had the chance to interact at the workplace with individuals from another culture
(the 63% of the respondents that participated in the survey). Regarding the question
"what is your opinion on the concept of diversity in the workplace?” the 63% of
respondents within the sample had different perspectives that relate to this question.
A first-class of responses was recorded from the perspective of relating to "the utility of
diversity in the workplace". From this perspective, a majority of respondents (60%)
have evaluated as good and very good a multicultural working environment. At the
opposite side, there were only two opinions from respondents who disagreed with
cultural diversity in the workplace. A second perspective is the maturity of this concept
within organizations. The answers for 30% of the respondents emphasized that
cooperation in a multicultural environment "is a new concept for Romania which is not
very well developed" and "will become increasingly greater diversity in the coming
years". The idea of this perspective that was quasi-unanimously formulated is that in
Romania the level of maturity in terms of working in a multicultural environment is
low but the trend will grow in the next period of time. In this item, there was a total of
10% other options that were distinct regarding the concept of diversity in the
workplace (one of the opinions stated, "cultural diversity would be good but only after a
number of years of experience "). In this item of the survey, the respondents limited the
utility of cultural diversity in Romanian organizations in terms of time, budget, utility
etc.
Regarding the question "what you consider to be the main advantages for conducting of
economic activities together with people from different cultural backgrounds?",
maintaining the same referential (like the group of 63 persons employed), analyzing
survey data reveals that 90% of respondents consider that there are clear advantages
of multicultural collaboration in the development of economic activities while 10% of
subjects actually perceive a certain advantage generated from such collaboration. In
the majority group (made up of those who claimed pro-economic benefits of
multicultural collaboration) their arguments represented the following perspectives:
diversification of ideas, a more pronounced competitive environment, and increasing
tolerance of employees towards people coming from other cultural backgrounds.
In the item of the survey were participants are asked to identify "the main drawbacks
on certain activities of persons with different cultural backgrounds" we can say that the
views were quite different, responses being divided into several classes. The most
important responses given were: "linguistic barriers, cultural particularities that are
difficult to understand and accept, difficult communication." Regarding the item that
722 Strategica 2016
targets the top risks that would involve "cooperation at work" with people coming from
other cultural backgrounds, most significant risks identified were the ”the risk of
understanding contextual environment, risk of bad communication, risk of conflict /
disagreement within the project team, risk of improper behaviors / attitudes”.
Interestingly is that 20% of those interviewed said that there are not specific risks to
the cooperation with people of other intercultural environments.
Figure 1. The kind of organizational environment the respondents would like to work in
The results of the analysis of data recorded shows that 38% of the respondents believe
that no matter the type of organizational culture or the manager`s nationality (for
obtaining organizational performance), a contrary view is expressed by another large
group (31 %) stating that they think the ideal solution is a " Romanian organizational
culture led by a Romanian manager". The other classes of responses recorded results
with lesser relevance regarding the sociological representation. An interesting
perspective is represented in the item that tests the "attitudes colleagues have when
collaborating with people from other cultural backgrounds".
In relation to the responses recorded on this item, over 80% of the interviewed
appreciated the attitude of colleagues as open and very open with peers coming from
other cultural backgrounds. A 10% of respondents believe that the attitude is a natural
one, while only 10% have the opinion that colleague’s attitude is hostile or very hostile
in relation to persons from other cultural backgrounds. The final question of the first
section of the questionnaire was applied to get a picture of future prospects on the
development of intercultural collaborations. The data showed that the perception of
the majority of respondents is that in the future the number of activities involving
multicultural collaboration will increase (75% of respondents) while the rest (25%) of
the respondents stated that the future situation is considered to be the same.
In the second section of the questionnaire were targeted the prospects of respondents
that participated in projects of international cooperation.
International and Intercultural Management Challenges 723
Figure 2. Mobility programs receiving most notoriety from respondents
From the group of people who responded in this section, 45% of them said they were
familiar with the provisions of international mobility programs while 43% of them
stated that they are familiar with these programs at the intermediate level. Regarding
the success of these programs involving students’ mobility, the results indicate a
positive perception and benefits of such a program. Thus, the question “how available
you are to apply?” were 66% of the respondents stated that are available and highly
available.
In the expectations of young students from mobility programs most important
references were related to the opening of new horizons, useful life experiences,
pleasant interaction with people from whom they can learn and acquire new
information. An interesting perspective has been an item that requested "to identify the
main risks associated with involvement in a project of international cooperation." The
risks identified were those related to mismatch, communication, accommodation,
financial resources, geographic issues, and quality of the courses. As a final perspective
on this second chapter of the questionnaire regarding the perception of possible
improvements of skills in personal and professional areas through mobility programs,
absolutely all the participants in the survey claim that there is room for improving
skills in personal and professional areas because of mobility and multicultural
interactions. In the third section of the questionnaire were identified prospects for
young people who have participated in international mobility programs.
724 Strategica 2016
Figure 3. The degree of satisfaction that respondents had during mobility projects
Regarding the image of this chart, 56% of respondents say they feel fulfilled and very
fulfilled in personally and professionally areas as a result of participation in such
programs of mobility, while 40% have a neutral perspective and only 4% a negative
outlook. Regarding the prospect of the young people that participated in intercultural
collaborations trough projects outlook, the majority stated a positive answer. The most
common answers freely expressed appreciation saying "I think it was a good
experience," "so far everything went well", and "great appreciation". The first class of
respondents identified as a recommendation for future ”increase tolerance and respect
within multicultural groups”, ”better integration of persons within project teams”, ”better
understanding and acceptance of diversity”, and ”a better level of communication”.
Conclusions
Summarizing the most important and outstanding issues identified in the sociological
analysis we can highlight the conclusive areas as following. Regarding the first
research question, no differences were identified regarding the interaction from the
perspective of gender. There is no fact in this study that females present significantly
differentiated views on this subject than males do.
With regard to the second question has been concluded that people who interacted
most frequently with co-workers coming from multicultural backgrounds are mostly
higher education graduates coming from urban areas. Because of research limits (small
size of the sample), we cannot state that such a characteristic can be representative of
the entire population.
The perception of the respondents regarding acceptance of cultural diversity at the
workplace is mostly positive. Most opinions show the fact that at work there were no
major problems in terms of communication or integrating the people who came from
different cultural backgrounds.
International and Intercultural Management Challenges 725
Regarding the third research question the potential of youth participation in
international cooperation programs, it has one determinant positive meaning that 66%
are available to attend such programs. The mobility programs notoriety results flow
around three programs (Erasmus, Fulbright, and Socrates) - which represent 84% of
the options.
For the fourth question, the perspectives of those who participated in mobility
programs state the fact that there is room for personal and professional development.
For the fifth research question in the risk identification item of international mobility
programs, we found that there is a common basis for defining and recording functions
of a contrary for those who want to apply under these programs and those who were
participants in these programs. There are, however, notable differences between the
two categories of persons. People who want to apply for international mobility are
focusing on risks of the language barrier, communication, and integration within the
group, while those who were already in international cooperation projects, focus more
on risks identified in the financial area.
Give the sixth and last research question recommendations for the mobility programs
that will be carried out in the future involves the rise to the tolerance levels, respect
within the working group, a better integration of people within project teams, a better
acceptance of diversity, and a better level of communication. From this study, we can
identify with ease those aspects of the tolerance perceived by respondents as being
good. The further development of this study is related to a rise in the number of
respondents and diversification of sample, as well as some perspectives from the
organizations that are implementing mobility programs at an international scale.
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International and Intercultural Management Challenges 727
ASSOCIATED RISKS TO DECISION MANAGEMENT IN ROMANIAN IT INDUSTRY, IN
THE CONTEXT OF SOCIAL AND POLITICAL INTEGRATION OPPORTUNITIES FOR
DEVELOPMENT
Alexandru Radu DUICU
National University of Political Studies and Public Administration
30A Expozitiei Blvd., Sector 1, 012104, Bucharest, Romania
alex.duicu@yahoo.com
Sergiu Octavian STAN
Doctoral School in Management
Bucharest University of Economic Studies
6 Piața Romană, 010374, Bucharest, Romania
sergiu.stan@comunicare.ro
Abstract. The research was conducted through semi-structured interviews, with 10
managers that run their companies in the IT industry. The interview questions were
designed so that the managers’ answers should reveal important aspects of the
managerial decision in risk conditions, being influenced by the context of integration of
social and political opportunities, for the development of the ICT industry. In addition, the
10 managers revealed aspects regarding popular risk management techniques applied in
Romania IT industry and strategies for risk mitigation to company development. The first
research question was set to find out what is the opinion of the ICT industry’s specialist
regarding the online environment and the business opportunities of this field in the
Romanian context compared with the international context. The second research
question was set to find out if the ICT specialists have a standard procedure regarding
the risk and opportunity identification process in their field of expertise. The third
research question was set in order to bring to light the real life experiences regarding risk
aspects that the ICT specialists encountered through their career. In the conclusions, was
created a big picture that describes the most important aspects of ICT risks that
specialists have to deal with and their view upon what the ICT context should really be in
Romania when compared with the international context. The responses were very diverse
but most of them really relate to one another. Being a semi-structured interview, the
answers had been interpreted in the most efficient way possible so that the reader could
extract his own conclusions while already having drawn the most relevant aspect of this
study.
Keywords: risk; decision management; opportunities; ICT; digital agenda; integration.
Introduction
At a global level in the European Union, through the internet and technology
innovations, communities are to be strengthened in the digital space. There are many
discussions about digital inclusion and the potential to create social cohesion trough
the online environment, but the main plan is to create a digital single market. The
decisions taken at the EU level affects every Member State differently. In the following
chapters, the context in which the European Union stands collides with the context of
728 Strategica 2016
the ICT industry existing in Romania, in order to create an overview of the situation in
which companies are placed. Some SMEs present a lack of IT capabilities and are facing
specific problems regarding their quality of delivering products and services caused by
a limitation in technological competencies (Balocco et al., 2012, p.2). Romania is a
country that has many opportunities for the IT companies to do business given the fact
that is an underdeveloped country compared with the average indicators presented at
the EU level. Therefore, is very much space for businesses to grow and many
opportunities to collaborate with the public institutions and non-governmental
organizations. With financial resources provided through public funds for the
companies, in order to stimulate the accomplishment of the Digital Agenda`s
objectives, the business sector should not miss this opportunity in the next years. In a
fast growing environment like the IT industry, with high competition, managers must
calculate very carefully their decisions and manage the risks in order to win market
shares.
The European Union`s vision of the digital space
The European Union Digital Agenda 2020, the seventh pillar of Europe 2020 strategy,
proposes to create a digital single market. Economy and society, along with
accessibility and the environment, are the three pillars that underpin the Agenda. Even
though the internet has no boundaries, barriers in terms of online markets are
necessary to be removed. Among all the actions that are to be taken, one of them is the
standardization of the interoperability so that the ICT industry could take full
advantage of the devices, applications, services and networks. Another action included
in the Digital Agenda is the internet security that prevents cyber-attacks. The European
Union wants the internet to be a safe place as possible as it can become for users
among all the 28 countries. Another action that is to be implemented in the member
states is to create an infrastructure that enables users to access the internet at a much
faster speed compared with the present situation. Alongside this action, the digital
agenda has proposed computer operation training programs regarding the skills
needed for EU citizens to access the digital space. The development of ICT
infrastructure on EU soil will also include an action regarding more investments in the
R&D sector of the ICT industry. The social benefits of a strong developed digital space
will be found mostly in the disadvantaged rural areas, in promoting cultural diversity,
in government platforms and in a much more flexible mobility for citizens (COM
245final/2, 2010, pp.7-27).
New regulations will occur with the formation of the digital single market in the
European Union. For instance, interoperability licensing has been much discussed and
debated. The largest companies in the IT industry should license the process by which
applications exchange data between them. The directive that requests licensing for
interoperability was challenged by international companies and were brought
arguments questioning the feasibility of the standards imposed by the European
legislative act (Graef & Valcke, 2014, pp.8-12). Other regulations require firms to take
into account several aspects related to human rights in the online environment at EU
level. Regarding access and use of online services, users must have granted access to
the electronic communication network and a minimum of services and applications. In
the case of online accessibility, there shall be no discrimination, confidentiality must be
ensured and the users must benefit of personal data protection and security. The
International and Intercultural Management Challenges 729
companies must be very transparent and provide clear information about contracts, as
well as offering the possibility of withdrawal from a contract. Another regulated action
is the providing of goods and services, referring to particular defects and delivery time
of the products. In addition, dispute resolution and access to justice are another
important right that is part of the EU code for citizens using the online environment
(European Commission, 2012, pp.4-19). The digital space is both a private and a public
one. Public opinions can be easily expressed and recorded through various platforms
owned by organizations or by national and supranational institutions. The digital space
gives the citizens of the European Union an opportunity to connect and exchange
different views and receive answers regarding state actions or to contribute to topics
put under public consultation. In addition, through digital space, citizens can form a
public space that enables discussions on political issues (Papacharissi, 2002, pp.21-
23). It must be taken into consideration that a high-level interaction between citizens
from different cultures with different points of view requires also a code of etiquette
regarding communication via the internet.
The Member States of EU have the opportunity to shrink the social exclusion of citizens
that cannot have access to the internet network because of the geographic area or
because of the lack of knowledge. In the first stage is intended to facilitate access to the
internet network in term of creating the necessary infrastructure. In the second phase,
it is intended to train the skills of the citizens that have no knowledge of how the
digital space functions; therefore, they cannot integrate properly in the online
community. These types of borders that restrict the access to the internet for some of
the EU citizens do not have a solid form. The border shrinks as more and more EU
citizens gain access and become active in the online community. One-step towards a
well-consolidated online community is the initiatives taken by the European Union
regarding policies that affect the online environment. There are strict policies for data
protection and privacy in the online environment, thus ensuring greater security for
users and becoming one of the most developed online environments at a global scale
(Mark, 2014, pp.65-66). The skills to use the internet and internet access, give people
the opportunity to integrate into different social environments that are specific to their
needs. New Media allows people who still do not have access to the internet to
integrate into different interest groups and get informed or receive feedback from
other users. In addition, integrating the people that do not have access to the internet
will give researchers the opportunity to study the social phenomenon and prospects,
resulting from a much larger number of citizens (Petrajanosova, 2014, p.404). Social
media describes the identity of its users through the information that the users are
sharing intentionally or unintentionally on their personal accounts or with other users.
We can state that the internet has the potential to act as a surveillance instrument for
researchers and other interested parties but must be used inside the boundaries of the
law and code of ethics (Xinaris, 2016, pp.61-67).
At the European Union Level, the ICT infrastructure development continues. The
development lies not only in broadening coverage but also in changing the existing
equipment with equipment that can provide a data circulation at a higher speed in the
digital space. The economic benefits of investments that are to be made in the
development of ICT infrastructure outweigh the costs at the entire level of the EU.
There are small differences in terms of cost-benefit if we individually analyze every
member state, but the resulting values are not much behind or in front of the average
730 Strategica 2016
value calculated at EU level. The Member States in Eastern Europe will need to invest
more in ICT infrastructure, especially in rural areas (Gruber, 2014, pp.1056-1057).
Regarding economic gain, the most advantaged will be the urban areas. A developed
ICT infrastructure is most useful to companies that have employees with the required
skills to use the full potential of a fast data exchange network and companies that are
dependent on accessing an abundant flux of information. Rural towns nearby urban
areas are second in line to benefit from a developed ICT infrastructure. In
disadvantaged rural areas, simplifying access to information in the digital space and
developing social services is more than enough at the given moment (Florence School
of Regulation, 2016, pp.11-12).
Developing the online environment in Romania
Romania Digital Agenda for 2020 includes four areas of action that reflect the vision of
the Digital Agenda for Europe 2020. The first area of action in the Romania Agenda is
targeting the public administration. The main concerns are the reducing of costs, the
rising of efficiency and developing the e-government platform. Romania Digital Agenda
for 2020 ensures the cyber security, develops cloud computing, open data, big data and
social media. The second area of action focuses on existing social needs nationwide.
The main concerns are implementing ICT in education, health, culture, and achieving
inclusion. The third area of action targets the economic environment in Romania. The
main concerns are implementing ICT in research, economic development, innovation,
and developing the e-commerce platform. The fourth area of action focuses on both
infrastructure development with a wide range of broadband access and the inclusion
of citizens in the online environment (Ministry of Information Society, 2015).
In Romania, there are 4 objectives for developing the ICT infrastructure undertaken in
the Digital Agenda for Europe 2020. The first objective is to identify and define the
context that exists on Romanian soil regarding the ICT infrastructure and calculating
the volume of investments needed. The second objective is related to identifying
specific areas where investments will most likely be made from public funds. The third
objective is to identify sources of funding for ICT infrastructure. The last objective is
related to motivating private companies to make investments in ICT infrastructure.
Thus, nationwide investments required for the vision of the Digital Agenda for
Romania 2020 is intended to be financed by public funds in partnership with private
funds (Ministry for Information Society, 2015).
Romanian’s National Strategy aims to increase competitiveness in the business
environment through innovation. In the coming years, there will be a direct impact on
the ability of the technological strategy of companies that will benefit from the services
offered through online platforms and integrated research networks (Bacescu-
Carbunaru & Condruz-Bacescu, 2014, p.138).
The IT specialists working in Romania are highly train considering that many of them
are looking to be hired by international companies. We can say that the skills of
experts in the IT industry are a result of their own will to accumulate knowledge and
making high standard deliverables because the Romanian education system does not
offer very advanced studies in relation with the IT industry. The courses do not have a
International and Intercultural Management Challenges 731
very technical approach, students wanting to be taught techniques used on a global
scale. For Romania students to benefit from an advanced IT educational system,
courses must be constantly adjusted to the requirements of the international IT
industry. This is a need for every IT educational system as an effect of the globalized
world that we live in (Fotache, Dumitru & Greavu-Serban, 2015, pp.14-15). Thus,
Romania has part of a skilled labor and recognized for the work quality of part of its
citizens, but must take the opportunity offered by improving the IT educational system
so may further increase the quality of skills owned by the future specialists in the field.
Context and opportunities for the IT industry in Romania
In such a dynamic environment as the creative industry, the risks and risk
management methods are different, depending on the specific sector of activity. There
is no standard by which to manage risks, each company has its own style in accordance
to their specific activities. Although there is no specific standard, most companies
believe that the risks are of high importance in the work that they carry. For example,
one of the biggest risks in media is changing the content strategy to an audience that
was already won but based on a previous content strategy (Stan & Duicu, 2015,
pp.125-127).
An important change will be made based on how the companies sell their products and
services. Through social media, consumers have access to a variety of products, may
collect information from other beneficiaries who have purchased the products in the
past and can choose the location of purchase. There has been a paradigm shift of the
old method of marketing. In the new paradigm, companies are put in a position to
compete in the digital space aiming the consumers directly. In the future, it is expected
that the consumers will no longer have to search for products or services, but products
and services will reach out to the consumers. Today, web media is an important
component of the ICT industry and represents some of the sectors with the highest
growth rate. It is important to note the fact that influence of digital media on a global
macroeconomic perspective, corresponds with a decrease in industrial and economic
influence for western countries (Vukanovic, 2015, pp.54-65). For example, in
Bucharest, 12,5% of all companies belong to the creative industry. Most of the domains
included in the creative industry are related to ICT. In 2013, most of the companies
that are part of the creative industry were activating in fields like media, advertising,
software, the web and IT. In the same year in Bucharest, the turnover of companies in
the creative industry was approximately 10% as part of the overall turnover registered
by all existing companies (Volintiru & Miron, 2015, pp.125-127).
The opportunities that Romanian companies can access through the ICT industry are
many. This can also be a statement of the current context that Romania exists in. A fast
way to develop the IT sector is to gather business models from other states and
implement the best practices in IT companies as well as in the Romanian institution.
For example, in France, IT companies have a greater lifespan and a lower number of
employees compared to the IT companies in Romania. Interestingly is that the
productivity of IT firms in France is 3 times higher than the productivity of IT
companies in Romania, considering that the number of employees is lower. This is an
opportunity of gathering the best practices implemented in other countries in order to
develop the ICT industry in Romania (Ceausu & Bourbonnais, 2014, pp.983-984). In
732 Strategica 2016
addition, the development trend must not be neglected. There are 3 main changes in
development represented by an increase in performance of hardware devices, more
user-friendly applications, and more entertainment-centric applications than
information-centric (Andy Ng et al., 2005, p.50).
The digital space brings a considerable improvement in the operational process within
the public institutions, also bringing considerable improvements in the communication
process used by the civil society. The digital environment enables organizations
representing civil society, to communicate with each other, both on a national and
international scale and to communicate important information in specific areas of
expertise. Thanks to the digital space, citizens have access to other sources of
information on vast topics of interest. Thus, there is the potential that more citizens
interested in a particular subject to bring support and to become involved in cases
initiated by civil society organizations (Burlacu, 2014, pp.92-94).
Regarding the public institutions, the e-governance system is one of the weakest in the
European Union. It must be specified that Romania citizens were a factor that
influenced the performance indicators used for the evaluation. According to the
statistics presented in 2013, there were only 5% of Romanian citizens who used e-
government services. In 2014, the percentage raised at 10%, but still not enough to
reach the EU average. Also since 2013, 2% of Romanians used the internet to send
completed forms to public institutions, following that in 2014, the percentage of those
who send completed forms via the internet grew to 3%. A very small percentage if we
compare to the EU average of 21% (Didraga & Brandas, 2015, pp.68-69).
Public institutions from Romania can make an impact with implementing an efficient
IT system in the disadvantaged rural area. An example of good implementation can be
received from China. A study concerning the implementation of health IT systems in
China’s disadvantaged rural areas has shown very good results. Health IT system
resulted in improvement regarding the prioritization of patients depending on the
severity of the situation and improvements to patient programming system that
reduced the waiting time in line. After the implementation of the health system, the
results showed the lower cost to patients and increased quality of medical service
offered (Liu, Chen & Qin, 2014, pp.983-984). Given that such a system does not exist in
the poor rural areas of Romania, it represents an opportunity for both the
administration as well as for the IT service providers.
Another opportunity for implementing an efficient IT system in public administration
is in the collection of statistical data. It generates decreased costs of collecting data
from different institutions or citizens and also simplifies data collection process and
the operational level. Taking into account that the Romanian Institute of Statistics has
legislative support, makes it a more credible source regarding the accuracy of data, so
this can generate great benefits for the institution as well as for the organizations
working with the data (Moga, Popescu & Antohi, 2013, p.6). Even though there were
presented many opportunities for the public institutions, most likely the companies
are the ones that will try to win the implementation contracts on the open market.
Some opportunities involve the public institutions as well as the social environment
and the companies activating in the IT industry, at the same time.
International and Intercultural Management Challenges 733
Research methodology
In this study were involved four IT specialists, three marketers, tow web developers
and one expert in e-commerce. Of all these specialists selected for an interview, seven
are graduates with a master degree, two are graduates with a bachelor degree, and one
has only a high school diploma.
In order to check the theoretical background that is in the first part of the article and to
answer the research questions, it was conducted a semi-structured interview that was
based on the analysis of 10 manager`s answers from the IT industry, involved in
various levels of development in this area and having different roles.
Being focused on the relevance of the interview results, we have had structured the
questions used, in terms of relevancy for our research theme, but also to put into value
the specific experience of the 10 managers involved in our sociological approach.
The interviewees are all involved in the ICT industry, four of them being generalist ICT
specialists; three are involved in the marketing area; two in software product
development; and one in e-commerce. In terms of position in the company,
respectively departments, five of the respondents are managers, two business analysts,
one is an SEO, one is a software tester, and one is a content specialist. It should be
noted that the level of education these interviewees have, is very high. Nine out of ten
people are college graduates (of which 7 with an MA), just one of the subjects having
completed only high school.
In perception terms of the current context that the IT industry from Romania finds
itself in, the answer interviewees gave had a degree of diversification relatively high.
For the general trend in the industry, seven of the respondents have a positive outlook
on the context in which is located the Romania IT industry.
While A.F. and A.M. consider the environment as "favorable" there are opinions
nuanced as those of B.M., claiming that the IT industry in Romania is "in continuous
development and expansion" or M.D. who claims "IT industry is growing and it pays to
invest in this area". The polar opposite lies in the perception of three other people
interviewed and who consider the economic environment rather unfavorable for the
IT industry, regarding its development (as G.S. states, "the IT industry in Romania is not
supported at the level that it should be, the most intelligent young people wanting to find
a job abroad").
Regarding the issue of specific decisions (in relation to the peculiarities of the local IT
market) that are taken in companies, the views expressed were sufficiently diverse.
Four of the respondents shared the opinion that decisions in their company are strictly
related to the specific request of the customers in building the final product; while two
of those interviewed are of the opinion that some specific influences but without
getting them concretely, while the remaining three consider that there is a specific
decision influenced by the IT market. The views expressed at this point were primarily
taking from different contexts, one in which they were the decision makers, and from
the role that they had in those actions. According to the most commonly circulated
opinion, the most difficult decisions were related to the working relationship with the
team, communication with customers, and planning projects specifically requested by
734 Strategica 2016
customers. A specific answer to the question says that "the most difficult decisions have
been taken in the planning phase of the development of applications and role. We had
given up on applications before their official launch because they were deemed not to be
quite promising". Among the most relevant opinions were those of A.M. related to
"decisions regarding the organization of the team. The result: I have not organized
everything properly and as a result, we were all working overtime." B.P. and G.S. argue
that "the decisions taken that led to the loss of customers” when we asked what were
„the most difficult decisions that were made by the people interviewees and identifying
the consequences of these decisions." Another interesting perspective of this study was
related to the role played by the interviewees in identifying opportunities and
analyzing opportunities. This is the only point where the interviewees were
unanimous in assessing for opportunities, special roles in making decisions. The
responses included the phrase "the role of opportunity in the decision-making process is
a very big" (T.A., G.S. and A.M.), the rest appreciating ratings of "very important" (G.L.)
or "significant" (A.L.). Perhaps these answers polarization around the two concepts,
important and significant, highlight the importance of the role that opportunity plays in
decisions making within the organizations activating in the ICT industry.
If in the case of the role played by opportunities in the decision-making process,
appreciation is unanimous, in terms of how to identify opportunities and analyze their
opinions, the answers diverge. Of the people surveyed, six consider that analysis of
opportunities does not involve an algorithmically system, there is no specific
methodology, but decision makers analyze opportunities based on personal
experience. The views are representative of C.R.M., saying "I do not use an algorithm or
methodology. Professional and personal experience play a very important role in
evaluating opportunities”, or the response of W.B. stating that „personal and
professional experience plays an important role in evaluating opportunities; the decision
is based on knowledge already assimilated." If a majority of those surveyed state that
opportunity management is strictly based on experience, there are two views from
respondents who identify the role of the algorithmic approach and a specific
methodology approach. Here we highlight the views of T.A. "yes, both have a share of
50%" or N.D., who says "yes, I make a list of criteria ...". Here we can highlight the views
of T.S. and F.A., strictly mentioning that "there is a specific methodology" useful for
addressing opportunities as the foundation of decisions. A separate department
pursued the study to identify the main risks related opportunities. Thus, the most
frequently mentioned risks were related to "subjective analysis of opportunities",
"decision-makers attitude to the project that was to be addressed", "lack of transparency
into the market" and "competitive risk".
Regarding the general risks encountered in decision-making, the most often mentioned
were related to "the risk associated with the human factor," "risk of insufficient
communication", "risk of erroneous decisions", "risk that the final product does not meet
expectations of the customer "and" lack of managerial skills ". Regarding the
methodology for risk management decision-making used currently by decision makers,
they mentioned various ways from which we could highlight the "probability theory"
(as in the case of C.R.M.), "analyzing and monitoring risk" (R.A.), "recording risks"
(A.M.), and "minimizing risk" (W.B.). However, there may surprisingly views from four
of those surveyed, expressing they are now aware of a risk management methodology
that they could apply in decision management.
International and Intercultural Management Challenges 735
Regarding the main risks that have turned into problems in the activities of firms
operating in the IT field is has been identified various perspectives. The first set of
response options of interviewees referred to the question relating to "insufficient
testing of the software before being launched in the market" or "A launch too late into
the market."
Another perspective is the inadequate training of software developers as it appears to
C.R.M., "the specific training of personnel for different projects," or to W.B., "continued
development of technology involves a continuous improvement of the technical process
used".
Another category of problems is related to the effective functioning of applications
eliminating as many unnecessary functions as possible, according to the opinion of G.L.
From another perspective is the issue of stable employment of IT programmers. There
are fears manifested expressively by R.A., "downsizing specialist immediately after
product development. Many companies’ programmers are fired immediately after they
launched a great product. " Here one can mention the opinion of G.S. which says that
"when the two companies developing two applications that do the same thing, first that
manages to develop the best application and manages to launch before the other can win
even 80% of the market."
The final component of the study aimed to obtain recommendations for the future that
"optimize management decisions and avoid transforming risk issues in the Romania IT
industry." The opinions of people interviewed were related to recommendations on
"making more market research and doing more analysis with focus groups" (T.A.),"
hiring more active and proactive people to contribute to solving problems" (G.S.), "a
better identification of a market segment served by the company and enhancing services
provided by this segment" (C.R.M.), "the implementation of a risk management system"
(R.A.), "a department of personal and professional development" (A.M.), "focus on
achieving service and top quality products, not just fast results" (D.G.), ”involvement in
the design and implementation of software by people that have a better training"(G.L.).
It is obvious that all these recommendations concern different perspectives, but the
common denominator of these recommendations would be linked to keywords such as
efficiency, optimization, professionalization, and a redefinition of a better market
share, the measuring instruments on demand, and a better degree of customer
satisfaction.
Conclusion
In the end of our paper, we want to emphasize the main conclusions that we have to
get in our study, in order to emphasize the most important remarks in terms of
qualitative perception (of 10 interviewed managers):
- The IT industry is well represented in Romanian economy, with a very important
tendency for a positive evolution in the next years, but insufficiently supported in an
effective way by the government.
- Even the IT managers knew a little beat about the risk management methodology, the
conclusion of the study shows that they do not apply constantly risk methodology of
specific knowledge in their current activities. In the majority of cases, risk
736 Strategica 2016
management is only a theoretical concept, considered to be very necessary, but hard to
be applied.
- The majority of the problems emphasized are embraced by the majority of the IT
managers in the interview. That proofs very clearly that we had recorded a common
base of initial risks that with an inadequate risk management approach will conduct to
the same problems.
- The major categories of the risks identified, are related to human resources or to the
managerial decision.
All these above-mentioned considerations, proofs once again the keen important role
of the risk management in the IT industry, but also the necessity to have good risk
managers specialized in the field.
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Successful Management in Service
Economy
Succesful Management in Service Economy 739
FINANCIAL INSTITUTIONS AND THEIR IMPACT ON THE DEVELOPMENT OF
CONTEMPORARY COMPANIES IN ECUADOR
Martha Paola ALVARADO VERA
Universidad Espiritu Santo
2.5 via la Puntilla, Samborondon-Ecuador, Guayas, Ecuador
malvarve@uees.edu.ec
Ruben Bernardo MANRIQUE PINCAY
Universidad Espiritu Santo
2.5 via la Puntilla, Samborondon-Ecuador, Guayas, Ecuador
rumanrique@uees.edu.ec
Abstract. This paper analyzes the evolution of the financial system and private banks in
Ecuador. The main objective of this paper is to present the impact of liquidity risk and
credit risk in contemporary companies and financial institutions. Due to, the challenges
of contemporary companies’ increase, because they must be completely linked to the
needs and demands of consumers, society itself, focus on globalization. The company
faces challenges every day as integrity, cash, borrowing, and resource management,
increased selection and competition, uncertainty, regulation, globalization, among
others. Therefore, that is the reason companies must be prepared because the right path
yesterday may not work today and could be a disaster by tomorrow according to Neal
Jensen. The methodology used is a combination of extensive literature survey and analysis
of data. In addition, the paper presents liquidity risk and credit risk management for
banks. The financing from financial institutions plays an important role in contemporary
companies, in the development and sustainability of projections, innovations, and
development. Nonetheless, financial institutions must be solvent and solid, in which, the
funds required by enterprises are very useful and allow them to minimize the risk and
face the uncertainty of the future. Whereby, it is important to know some principles that
help financial institutions to manage their liquidity risk, especially decreasing their risk
management. Funding to contemporary business is vulnerable to several factors that
occur in the economy of a country, among which are mentioned: diversifiable risks as
non-diversifiable, transaction costs and loan guarantees. The financial problems in Media
Industry are analyzed. Financial institutions whether small, medium or large, play a role
very important in an economy because they take advantage of market opportunities in
their favor and constantly moving the flow of money, being an engine for developing
economies and developed countries because a liquidity financial shows solvency for
investment. Liquidity financial should also be emphasized that financial institutions in an
economy allow increasing lending to companies.
Keywords: financial institutions; contemporary companies; liquidity risk; credit risk
development; management.
740 Strategica 2016
Introduction
The challenges every business faces every day are integrity, cash, borrowing, and
resource management, increased selection and competition, uncertainty, regulation,
globalization, among others. Therefore, that is the reason companies must be prepared
because the right path yesterday may not work today and could be a disaster by
tomorrow according to Neal Jensen who was mentioned in Forbes magazine (2013).
The World Economic Forum (2015) found the three main problematic factors for doing
business in Ecuador are restrictive labor regulations (14.5), tax rates (13.7) and
complexity of tax regulations (12.2), among others specified in Figure 1.
Figure 1. The most problematic factor for doing business in Ecuador (2015)
Financial problems as Cash, borrowing, and Resources Management mentioned by
Neal Jensen, “becomes even more important during recessionary times when cash is
flowing more slowly into the business and creditors are less lenient in extending time
to pay” (FORBES, 2013). In addition, cash flow challenges are intensified by the lending
climate, principally for small businesses. According to ASOBANCA (2016) showed that
the Country Risk (EMBIG) in Ecuador at the end of June 2016, had an average country
risk of 893 points (see Figure 2). That is, a decrease of 20 basis points compared to
May. While there was an increase of 118 points compared to June last year.
Figure 2. Country Risk (Jun/2016)
Succesful Management in Service Economy 741
Nevertheless, Neal Jensen argued that “Problem Solving and Risk Management is a
major challenge for all companies is identifying, assessing, and mitigating risks,
including human and financial capital, in addition to the macroeconomy” (FORBES,
2013). Companies must develop a robust problem-solving capability at all levels.
Whereby, companies must identify and measure risks to be able to cope with financial
problems. Therefore, liquid risk and credit risk will be discussed.
National financial system of Ecuador
Then, companies to obtain financing, they are turning to financial institutions to
increase the flow of money and the total of their capital through investments. A
Financial Institution (FI) “is an entity that is in business to, among other things, accept
deposits, make loans, exchange currencies, and broker investment securities”
(INVESTOPEDIA, 2015). For example, financial institutions in Ecuador
(Superintendency of Banks, 2016) are Private banks (22), Insurers and reinsurers in
operation in January 2015 (37), Foreign Private Bank (1), Brokerages (39), Financial
companies (10), Financial groups (8), Public Financial Institutions (5), Fund managers
(26), Mutualists (4) and Credit Card Issuers (2). The National Financial System of
Ecuador (see Figure 3) is comprised of the following institutions: control agencies,
public financial institutions, private financial institutions, financial services
institutions, auxiliary services institutions.
Figure 3. National Financial System of Ecuador (2016)
742 Strategica 2016
However, not every financial institution provides all of those services. Some just accept
deposits and make loans. Others focus mainly on brokerage services. Therefore, the
role of financial institutions is achieving sustainable development, “which leaves at
least the same amount of capital, natural and man-made, to future generations as
current generations have access to” (INVESTOPEDIA, 2015).
Financial institutions interact with the environment in a number of ways as investors,
as innovators, as valuers, as powerful stakeholders, as polluters, and as victims. In that
way, financial development can affect growth through three main channels mentioned
by Gertrude (2003): (i) it can raise the proportion of savings channeled to investment,
thereby reducing the costs of financial intermediation; (ii) it may improve the
allocation of resources across investment projects, thus increasing the social marginal
productivity of capital; and (iii) it can influence the savings rates of households.
Liquidity risks in Ecuador
Gómez (2015) explains that liquidity risk in a financial institution is evidence that such
institution does not have cash reserves sufficient money to meet its financial
obligations, in addition to this cannot meet repayments to investors and cannot satisfy
the demand for settlement with their customers.
According to Islamic Financial Services Board (2012) the types of liquidity are liquidity
and market financing. With regard to liquidity risk, financing refers to the inability to
meet efficiently processes cash flow, operational activities and other financial
obligations to expected or unexpected events that occur now or in the future. So, the
outputs of money as reimbursement of deposits and investment, payments to
creditors, enforcing contracts, among other activities that are performed by the
financial institution in a balanced way without harming future operations.
The private banks in Ecuador have gone through its difficulties in a matter of liquidity
and solidity. Due to facts as the crisis of 1999 known as “bank holiday”, and the crisis of
2008. Currently for the low price of oil worldwide, the appreciation of the dollar
against other currencies, the increase in VAT from 12% to 14%, and the restriction on
imports (safeguards). Islamic Financial Services Board (2012) explained that this
generates speculation customers, which generates an internal financial crisis, as
customers withdraw their deposits money because they fear that their accounts are
frozen and this can become a financial problem chain to more financial institutions
because volatility changes.
Falling levels of liquidity which for December 2014 were USD3.373.7 million, then for
the next year fell to USD $ 1.6408 billion, but by May 2016 rose again USD1762.5.
However, Central Bank of Ecuador (2016) shows that these indicators are more a
reflection of the lack of dynamism of the Ecuadorian economy. However, liquidity
levels in June 2016 for USD 3234.6 million, while the previous month was USD 1045.1
this value million (see Figure 4). Changes in the liquidity of this month due to
Succesful Management in Service Economy 743
operations public sector by USD 1,762.5 million (54.5%), the private sector by USD
968.5 million (29.9%); the external sector by USD 381.4 million (11.8%); the other
financial corporations by USD 109.7 million (3.4%); and other sectors by USD 12.4
million (0.4%).
Figure 4. Financial system liquidity, millions of USD (Jan/2011-Jun/2016)
ASOBANCA (2016) informed that the balance of private bank deposits closed the first
half of 2016 at the US $ 23,906,000, which meant a monthly growth 2.0% and annual
0.5%. Annually, this meant increasing from US$127 million after twelve (12) months of
negative annual variation, June is the first month to register a positive variation.
------------ Annual change (%) ------------ Total deposits
Figure 5. Annual change and total deposits from private banks, millions of USD
(Jun/2013-Jun/2016)
Creditworthiness and image of a financial institution, allows withdrawals are lower,
shows that it is a safe entity as it meets its financial obligations on time, avoid the
anticipated sale of its assets and avoid resorting to alternative aid in the interbank
market or central bank support because they generate costs. So, “depositors always
want to have available the amount of money kept in banks and show loyalty when the
institution shows good quality of services while providing access to credit” (Islamic
Financial Services Board, 2012).
744 Strategica 2016
Liquidity risk management for banks
Whereby, it is important to know some principles that help financial institutions to
manage their liquidity risk, especially decreasing their risk management. Therefore,
“liquidity risk management is a key banking function and an integral part of the asset
and liability management process” (Bank for International Settlements, 2008). About,
the managing liquidity risk is regulated along with other types of risk affecting
financial institutions, which are subject to the recommendations of the Committee on
Banking Supervision (Basel III) published in Fiscal Policy Research Institute of
Thailand (2010), which establishes the "Principles for the proper management and
supervision of liquidity risk ", in total there are 17 principles.
So, the recommendations on bank liquidity risk management generally emphasize on
the following principles 1-7 (see Figure 6). With regard to the first principle, one bank
is responsible for the good management of liquidity risk to ensure sufficient liquidity,
through high-quality liquid assets as support from unexpected events that cause loss of
funding. At a time Gómez (2015) argues when liquidity risk is high-risk supervisors
should take measures to protect depositors and to limit damages in the financial
system.
Sufficient capital buffer and liquidity adequacy must
Principle 1
be provided in both regular and stress events.
The monitoring process should put off-balance-
Principle 2
sheet items under observation.
The information system is necessary for the senior
Principle 3
management to monitor and measure liquidity risk.
The diversification of funding sources and of liabilities is
Principle 4
required for sound liquidity management.
Stress-testing must be conducted with a variety of “what
Principle 5 if” scenarios, with the aim of developing efficient
contingency funding plans (CFPs).
Each bank should provide adequate level of disclosure of
Principle 6 information for public perception and risk-management
purposes.
The role and involvement of supervisors in liquidity risk
management is crucial. The supervisors should conduct
Principle 7 an independent evaluation of a bank’s strategies, policies,
procedures, and practices related to the management of
liquidity
Figure 6. Principles for the proper management and supervision of liquidity risk
III The Basel Committee (Gómez, 2015) has published documents that allow you to
manage liquidity risk and has established principles for proper management and
Succesful Management in Service Economy 745
supervision of liquidity risk. Among these documents, there are rules as the liquidity
coverage ratio and tools for monitoring liquidity risk.
For example, in this Ecuadorian case, the index of private bank liquidity concerning the
relationship between the funds available and total short-term deposits was 33.6% for
June 2016; this ratio increased by 10.2 points percentage compared with the same
month last year informed by ASOBANCA (2016).
------------ Funds available/Total short-term deposits
Figure 7. Liquidity-Private Banks, percentage (Jan/2013-Jun/2016)
Gómez (2015) advises that the liquidity coverage ratio is a coefficient to 30 days to
analyze the resilience due to potential liquidity payments. By this formula, they can
ensure that banks have sufficient high-quality liquid assets for any unforeseen
situation.
Another indicator is the net stable funding ratio indicated by Gómez (2015), which
measures the amount of stable funding sources of financial institution concerning the
liquidity of the assets financed.
The Islamic Financial Services Board (2012) informed that a financial institution must
have integrated and comprehensive liquidity management that integrates the
processes of risk management of the company to obtain the necessary liquidity to meet
daily financing activities and has funds to any anticipated event or unexpected to
continue with the normal operation of the company.
According to the principles for managing liquidity risk (Fiscal Policy Research Institute
of Thailand, 2010), the role of supervisors is necessary, sell assets on the market to
raise money effectively to mitigate risk. There are times when the market does not
have enough investors, hindering the sale of assets, which helps to increase funding
746 Strategica 2016
liquidity risk. So, “a failure in liquidity risk management may result in a bank becoming
unable to meet its obligations” (Bank for International Settlements, 2008).
Total assets (see Figure 8) at the end of June 2016, reached a total of USD $ 32,387,000,
contrasting the balance obtained in June 2015 where the service reached USD $ 32,134
million. In annual terms, this account grew by 0.8%, this is the first positive change
after ten months of contraction.
------------ Annual change (%) ------------ Assets
Figure 8. Assets, millions of USD (Jun/2013-Jun/2016)
------------ Annual change (%) ------------ Investments
Figure 9. Investments, millions of USD (Jun/2013-Jun/2016)
The investment (see Figure 9) account recorded a surplus of USD $ 3,264 million,
which meant a monthly decrease of 9.6%. In relation to total assets, investments
represent 10.1%, while in June last year was 11.6%.
Succesful Management in Service Economy 747
Destination Gross Portfolio
Types of credit Balance Composition
Commercial Credit 8.698 47%
Housing Credit 1.906 10%
Microenterprise Credit 1.686 9%
Total Production Credit 12.291 66%
Consumer Credit and Education 6.413 34%
Total Gross Loan Portfolio 18.704 100%
------------ Annual change (%) ------------ Equity + Net profit
Figure 10. Equity, millions of USD (Jun/2013-Jun/2016)
Figure 11. Credit Destination, millions of USD (Jun/2013-Jun/2016)
Account Private equity Banking System as of June 2016 had an accumulated balance of
USD $ 3,329 million. Similarly, in annual terms, equity recorded an increase of 3.3%,
which he meant a growth in the balance $ 106 million, which in turn means greater
Banking solvency.
Credit in Ecuador
Credit as an important channel of financial intermediation for economic growth.
Nevertheless, in times of economic crisis, banks usually have no economic losses and
solvency. It is recommended that banks have sufficient resources to act as a buffer
against unexpected losses. An activity of private financial institutions, granting credit is
generating benefits for the institution but in turn involves various types of risks,
including credit risk (Ross, Westerfield, & Jordan, 2010).
In Ecuador, ASOBANCA (2016) informed that at the end of June, the balance of credit
from private banks reached a value of USD$18,704,000. Thus, the total funding
provided by private banks, USD $12,291 million were allocated to production credit,
with credit for the productive sectors, housing and microenterprise are located at 66
% of the total. While credit for consumption and education was 34 % of the total,
equivalent to USD$6,413 balance millions.
748 Strategica 2016
ASOBANCA (2016) showed the rate of banking coverage (see Figure 12), expressed
through the relationship between portfolio provisions against unproductive portfolio,
reflecting the end of June 2016 a ratio of 1.6 times. The total provisions recorded a
cumulative total of USD $ 1,320 million balance; while the unproductive portfolio was
USD $ 807 million.
------------ unproductive portfolio ------------ portfolio provisions
Figure 12. Banking Coverage, millions of USD (Jun/2013-Jun/2016)
Credit risk management for banks
Credit risk is the likelihood that economic to financial institutions that make loans
losses are generated because the payments by the borrower are not met in a pay
period established by both parties. Also, Ross, Westerfield and Jordan (2010) Found
that the structure of the assets of a company determines administrative decisions on
the amount of cash and inventory should have, like credit policy, acquisition of fixed
assets, etc.. Cóndor and Cajamarca (2014) argued that the risk management of credit
must ensure the quality of their portfolios, and also identify, measure, control, mitigate
and monitor exposures counterparty risk and potential losses that could be generated,
with the aim of having coverage provisions or technical heritage in the event that the
credit risk increase.
The latest information available from the Bank Superintendence (BS) shows that at the
end of December, qualified as A and B, overall, portfolio reached 94.95%, reflecting a
portfolio of the private banking system, almost entirely, of low and moderate risk. The
portfolio with a rating of C, D, and E, meanwhile, accounted for 5.05% of the total loan
portfolio.
Succesful Management in Service Economy 749
Figure 13. Bank Quality Credit (Dec/2012-Dec/2015)
Cóndor and Cajamarca (2014) contributed to analyzing the late payment that it is
measured as the relationship between the unproductive portfolio to gross loans, and
portfolio quality index is measured as the ratio of risky portfolios and gross loans by
business line. Investors know that the credit risk can be presented by any lender,
which require a higher yield to compensate for this risk. Therefore, “the financial
institution must collect information and analyze the creditworthiness of the customer”
(Ross, Westerfield, & Jordan, 2010) and the higher the risk of certain credit presented
by the buyer, the lower the loan term.
Figure 14. Unproductive Credit Portfolio (Jun/2016)
The default rate for all private banks in Ecuador (see Figure 14), at the end of June
2016 stood at 4,31%. Monthly, it is decreasing by 0.9%. Housing and trade loans are
the least default rate compared to consume and small business as microcredit.
Ecuador's private banks are now more cautious in lending because this way they can
maintain their liquidity. On the other hand, credit also depends on how efficient are
banking assets. Widespread economic circumstances cause that households and
businesses have difficulties to honor loans in a timely manner so that nonperforming
750 Strategica 2016
loans have increased in recent months and this discourages financial institutions to
offer loans with the dynamism of years above.
If a company runs out of cash (liquidity risk), it is forced to sell marketable securities
and short-term cannot meet its obligations. The Fiscal Policy Research Institute of
Thailand (2010) specified that without sufficient liquidity reserves, there is a risk of
self and problems solved between the lending capacities occur, the economic recession
and credit losses.
How reduce credit risk? it is worth mentioning that there are no formulas to assess the
probability that a customer does not pay. Why there are five basic factors C are
assessed credit to customers:
- Character: Refers to the client's readiness to meet its payment obligations.
- Capacity: The client's ability to meet its credit obligations.
- Capital: Liquidity customer.
- Collateral: Assets given as collateral in case the respective payments are not made by
the customer.
- Conditions: general economic conditions in line with customer business or
professional activities.
How risk financial institutions are protected after giving credit? When credit is granted,
the financial institution monitors the lending transaction and, if it detects the
possibility of losses, take a portion of money from its capital, equivalent to the
expected loss, and reserves to face the damage. This reserve is known as "provision".
How a provision calculated? It is estimated, in general, credit rating with a scale,
according to parameters such as timely payments, type and amount of guarantees, the
behavior of the debtor's business, etc. The most common scale assigned letters from A
to E to credit, where A represents a credit that will fully recover and E a loss. The
company performs both ratings as provisions for each credit according to the scale at
which it is found, in accordance with the regulations of the country. This is the method
legally established in several countries such as Ecuador and followed by financial
institutions.
Impact on the development of contemporary companies in Ecuador
Figure 15 shows that in the second quarter of 2016, the companies requesting new
credit belonged most to the branches: Industry (19%) and Commerce (16%) compared
with the Construction (10%) and Services (7%). This corporate behavior holds for the
group of large and small businesses. In the case of micro-enterprises are Construction
(11%), followed by Industry (8%) with high rates.
Succesful Management in Service Economy 751
Figure 15. Companies requesting new loans (II Quarter/2016)
In the second quarter of 2016, in the group of large and micro companies as well as in
the total, those belonging to the Construction sector were the most difficulties had to
pay their debts (37%, 31 %, and 33 %, respectively); however, in the group of SMEs,
Construction were the lowest incidence (30%).
Figure 16. Companies with difficulty paying their debts (II Quarter/2016)
Financial problems in media industry
In Ecuador, many people decide to take the path of "entrepreneur" and become one of
them, but there are few who succeed. This happened with the morning daily called
‘HOY’, company that went bankrupt after working more than 30 years. HOY won a very
important place in the Ecuadorian press, for its openness to the different currents of
opinion until the day of its closure on 26 August 2014. The financial problem was
generated in the media industry for the аbundаnce of free information аvаilаble on the
Internet, worldwide phenomenon that has affected many newspapers, the newspaper
had in its circulation decline, which led it to close its activities in 2014 (Torres
Rodriguez, 2013).
752 Strategica 2016
The Internet was the main problem for this company went bankrupt (Canals, 2001).
Due to globalization, companies must аccommodаte with innovations but if they do not
do that, they will not be able to compete with companies that accommodate easily with
innovation. That is exactly what happened to the Journal HOY. Even if HOY is not a
contemporary company, they had a contemporary problem, which sparked a financial
chaos.
The Superintendence of Companies of Ecuador reported in 2014 the dissolution of
more than 700 companies, among which is Edimpres, which was in charge to prints
HOY’s newspaper, by backslide for two years in losses of 50% or more of the capital,
but for years the situation of the company was problematic, as agreed authorities and
employees (Superintendencia de Compañía, 2014). According to the Superintendence
(2014), the dissolved companies did not submit releases that could show that
remedied the grounds for dissolution. Instead, the company committee HOY has 154
workers who, according to its agent, HOY owed two months' salary (July and August)
and the fourteenth salary (an extra minimum wage of $340 to cover expenses for the
start of the school).
According to research by The Andes, HOY came generating losses as a company for 15
years (eight years before the current government and 14 years before the term of the
Communications Law), according to the Superintendence of Companies (ANDES,
2014). Besides, its low circulation ceased to be attractive long for advertising
companies. Economic losses of HOY (Edimpres) reached 63% of its assets in 2013,
which is a violation of the Companies Act, which requires that the accumulated losses
do not exceed 50%, said the regional director of Control, Inspection, Audit and
Intervention of the Superintendence of Companies, Azucena Palacios.
According to the statements of financial position found on the website of control, an
entity concludes that in the last 15 years operations daily were now negative, as the
company only made a profit in 2004, 2005 and 2006. This clarifies that the closure of
rotary issues related to the Communications Law (effective June 2013), but with
permanent periodic financial problems should not be. The rotary Jaime Mantilla, one of
the 209 registered print media in the Andean country, according to the Council
Regulation and Development of Information and Communication (Cordicom) always
showed negative figures on their balance sheets and financial problems. In 2014, the
company had to notify four glosses for late payment of $132 each employer's liability
rightly that might include medical care, pensions or actions irrigation work to the
Ecuadorian Institute of Social Security,
In addition, from January 2012 to February 2014, the Ministry of Labor received 41
complaints against Edimpres, including cases, consist of pensions, salaries and wages
evictions. Because of these complaints, the ministry of State determined a fine of $
150.530; a process is in the stage of coercive. The Superintendent of Companies, Suad
Mansour said in the Twitter "By law the @SuperciasEC dissolved companies. It does
not distinguish whether it is a media, a pharmaceutical, real estate, or whatever." He
adds that once the dissolution notified, no company can operate because the
Companies Act is for everyone" (Superintendencia de Compañía, 2014).
Succesful Management in Service Economy 753
According to Article 361 of the Act, the loss of 50% or more of the capital is one of the
grounds for dissolution of companies. In this case, they had to close their door to the
employees and work online in Ecuador.
Conclusions and implications
The data shows that the banking system is solid and liquidity, but it is taking to
preserve liquidity forecasts in a difficult year. The decrease of deposits is making
banks more cautious when to provide credits. The restriction is reflected in higher
requirements for customers, longer times in approval and disbursements and the
demand for more guarantees.
Another point very relevant, the banks should set a liquidity margin, including the
creation of liquid assets that are used in stressful situations. The financial institution
must determine costs, benefits and liquidity risks of its activities. In addition, stress
scenarios should design and develop a contingency plan operational. Then, financial
institutions must be solvent and solid, in which, the funds required by companies are
very useful and allow them to minimize the risk and face the uncertainty of the future.
Is for that reason, that we have presented in this paper some principles to liquidity risk
management and how Ecuadorian financial institutions manage their credit risk.
Contemporary companies can take steps to minimize the risk; however, this is not
released. They can apply various techniques such as financial innovations, sensitivity
analysis, cash budget, analysis of projections, among others.
References
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coinciden empleados y autoridades [Financial problems originated dissolution
daily HOY, employees and authorities agree], ANDES.
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Private Ecuadorian Banking]. Retrieved from Asociación de Bancos del Ecuador:
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Banco de Pagos Internacionales. (2008). Retrieved from
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Bradley, V. (2015, February). Four Financial Innovations That Will Drive Growth in
2015. Retrieved from Innovation Insights:
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Canals, J. (2001). Internet, innovación y estrategia de la empresa [Internet, innovation
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754 Strategica 2016
Central Bank of Ecuador. (2016, May). Liquidity management in the financial system.
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/gli201605.pdf.
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Succesful Management in Service Economy 755
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756 Strategica 2016
STATE OF PLAY OF BANKING INDUSTRY IN INDONESIA;
AN APPLICATION OF SPACE ANALYSIS
Nuri WULANDARI
Indonesia Banking School
35 Jl.Kemang Raya, Jakarta, Indonesia
nuri.w.h@ibs.ac.id
Riani ISSEGANA
Indonesia Banking School
35 Jl.Kemang Raya, Jakarta, Indonesia
rianiissegana@gmail.com
Abstract. In analyzing competitive environment of an organization, many tools have
been created and applied. One of the methods that is rarely used but yet instrumental in
analyzing industry competitiveness is Strategic Position and Action Evaluation (hereby,
SPACE). SPACE analysis comprise of a four-quadrant matrix developed by Rowe et al.
(1994). The SPACE matrix is commonly used in strategic management literature larger
due to its integrative power over the standard tools and techniques (Radder & Louw,
1998). Despite the important use and simplicity, the application of this method in the
banking industry is still rare. Thus, this study is trying to add to the literature the use of
this tools for analyzing bank industry strategy, SPACE analysis methodology is a mixed-
method consisting of interview and survey. Prior to the study, 3 (three) experts on
banking were asked to confirm the research indicators. The research then interviewed 12
banks representatives, who hold senior position in each bank surveyed. The bank were
chosen based on different bank sizes in the industry following central’s bank
categorization. The respondents gave scoring on the internal and external factors sheet
prepared for the analysis. The result of the analysis of SPACE matrix is presented in the
interpretation of the postures in terms of its environmental stability, industry strength,
competitive advantage and financial strength. A strategy is then derived from the posture
to guide for the player’s next action against competition in the industry. The study found
that Indonesia banking industry has aggressive and conservative postures. The paper
explores some of the bank surveyed, which represent each posture, and the strategies
suggested in response of the postures. The study has provided a valuable insight to the
banking industry’s state of play and has practical value since it consists of suggestions of
strategies that can be implemented by the companies.
Keywords: strategy; management; banking; SPACE matrix.
Introduction
The global economic banking industry is under pressure in today’s business climate.
According to World Bank (2015) global growth slowing from 2.4% from 2.6% in 2014.
It seemed that macroeconomic condition is still not fully recover to provide support
the industry growth. In addition, banks are also struggling with intense competition
within the industry to win the customers. The customers’ demand is pushing the
industry to find an innovative and efficient solution to get ahead of the market. The
Succesful Management in Service Economy 757
pressure is felt across the regions including Asia Pacific (APAC) region which has
topped the growth in the last decade. When the global average banking ROE still in
single digits, APAC banks averaged 13% from 2007 to 2014 (Ernst&Young, 2015).
Indonesia ranked as top three countries in APAC category of emerging markets for
driving the growth in the region. However, since 2014 APAC is experiencing slower
growth. Although still in leading position, it needs a deeper understanding of the
market strategy of the players involved.
The aforementioned situations have forced bank industry to evaluate its strategy to
adapt to the current situation. In order to evaluate strategy, it is prerequisite to know
the state of play in the industry to assess internal and external challenges. One of the
methods that are rarely employed in the banking industry is Strategic Position and
Action Evaluation Matrix, developed by Rowe et al. (1994). The Strategic Position and
Action Evaluation Matrix (SPACE Matrix) is a four- quadrant framework, which
indicates whether aggressive, conservative, defensive or competitive strategies are
most appropriate for a given organization (David, 1997).
The objective of this study is to understand the state of play of banking industry in
Indonesia and to evaluate the competition using SPACE analysis framework. SPACE
matrix method is selected since it is more superior than others due to its capability to
take account many factors in building the dimensions. SPACE Matrix will result in one
of the four suggested postures based on the positioning of the banks judged by internal
and external factors. Thus, the result should contribute suggestion of appropriate
strategy for the banks. The study also takes account various sizes of banks in order to
give a more comprehensive view of the market positioning of each size and whether
they need to develop a different strategy in the market.
SPACE Matrix
The use of analytic tools helps in building strategies to win in the complex market
(Rudnicki & Vagner, 2014). Various methods have been employed to assess the
environment and determine the competitiveness of an organization. Methodologies
such as Boston Consulting Group (BCG) product portfolio, McKinsey‘s Industry
Attractiveness/Company Strength Matrix, General Electric (GE) Stoplight Strategy,
Directional Policy Matrix (DPM) and Profit Impact of Market Strategy (PIMS) have
been known and widely used. However, some limitations are identified with these
methods. The Strategic Position and Action Evaluation (hereby, SPACE) Matrix
developed by Rowe et al. (1994) is trying to overcome the limitations of the previous
frameworks by incorporating more factors and adding two key dimensions into its
internal and external evaluation.
The SPACE matrix starts with internal and external evaluations, which are depicted in
the area in a four-quadrant matrix, consists of two axis. The axis represents the
combination of internal dimensions and external factors. Internal dimensions consist
of Financial Strength (FS) and Competitive Advantage (CA). External dimensions
consist of Environmental Stability (ES) and Industry Strength (IS). Each dimension has
building factors. The factors are assigned appropriate numerical values, which then
averaged to determine the position of dimension in the matrix. The position in the
matrix will result in four basic strategic postures in SPACE matrix: aggressive posture,
competitive posture, conservative posture and defensive posture (Radder & Louw,
758 Strategica 2016
1998).
The SPACE matrix are commonly used in strategic management literature larger due to
its integrative power over the standard tools and techniques (Radder & Louw, 1998).
The framework application in has been favorably used to evaluate competition in
various areas and industries, including sport industry (Cross & Henderson, 2003),
leisure centers (Benson & Henderson, 2005), airlines industry (Torlak & Sanal, 2007),
destinations (Courtis & Mylonakis, 2008), environmental management (Nouri,
Karbassi & Mirkia, 2008), volunteer tourism organizations (Benson & Henderson,
2011) and small-medium enterprises. However, the application in banking is
somewhat scarce.
Methodology
The study is a mixed method comprised of the interview and a survey. The study
conducted 3 (three) initial interviews to confirm SPACE variables. After the variables
were confirmed, the study planned to interview up to 12 respondents to answer the
SPACE matrix questionnaires. The respondents were selected with following profiles:
senior bankers with 20+ years experience in the industry and have or had been
working in the target bank in a decision-making position. This includes director and
commissioner position of the bank. The investigation involved 12 different banks with
different bank sizes. According to Indonesian’s Central Bank (Bank Indonesia) there
are four bank categories grouped by their core capital size. Category I is for bank with
core capital less than IDR 1,000,000 million, category II is for bank with core capital
between IDR 1,000,000 million to IDR 5,000,000 million, category III is for bank with
core capital between IDR 5,000,000 million to IDR =30,000,000 million and lastly,
category IV is for bank with core capital above IDR 30,000,000 million. Three banks
from each category were conveniently selected to be interviewed. The result of the
interview is a filled out survey, which then calculated and plotted to develop the
matrix.
There are two approaches in SPACE matrix numerical calculation, one is by (Rowe et
al., 1994) and the other by (David, 1997). A recent development by Borocki (2011) has
also provided a modified version of the calculation. Despite having a slight variation on
assigning the values of factors and on the numerical scale both Rowe et al. (1994) and
David (1997) approach aimed for the same end result. Thus, this study is following
methodology from Rowe et al. (1994), which also had been followed by Radder and
Louw’s (1998) research.
The research followed basic steps to develop SPACE matrix (Rowe et al. 1994; Radder
& Louw 1998). The first step is to select a set of variables to define Financial Strength
(FS), Competitive Advantage (CA), Environmental Stability (ES) and Industry Strength
(IS). Interviews were conducted to crosscheck the variables from Rowe et al. (1982) to
ensure the relevancy of each variable to the banking industry. The next step is to
assign a numerical value ranging from +1(poor) to +4(excellent) to each of the
variables that make up the FS and IS dimensions and assigns a numerical value from -1
(excellent) to -4 (poor) to each of the variables that make up the ES and CA
dimensions. The third step was to compute the average score for each variable by
summing the values given to the variables of each dimension and dividing by the
Succesful Management in Service Economy 759
number of variables included in respective dimension. The scores for FS, IS, ES and CA
were then plotted on the appropriate axis in the SPACE matrix. To result in coordinate
is a by adding two scores on the axes opposite each other to obtain directional vector
points. The x axis coordinate is determined by sum of CA and IS, while the y axis
coordinate is determined by the sum of FS and ES. Knowing the x and y coordinate
result in a point in the matrix which then a directional vector can be drawn from the
origin of SPACE Matrix through the intersection point to reveal the type of strategies
recommended for the organization.
The result then plotted to the four quadrants of strategic posture with different
characteristics. There are four basic strategic postures in SPACE matrix: aggressive
posture, competitive posture, conservative posture and defensive posture (Radder &
Louw, 1998). Aggressive posture is usually found in an attractive industry with a stable
economic condition. Competitive posture is defined by attractive industry in a
relatively unstable environment. The organization has high competitive advantage
qualities, however, critical disadvantage in its financial strength. Conservative posture
is marked by unattractive industry in a relatively stable environment. The organization
in the conservative area lack of products or services with a competitive edge. The
Defensive posture is characterized by unattractive industry where competitiveness is
also low. The organization is critical in its financial strength and lacks of competitive
products.
In the SPACE Matrix meetings with the respondents, a short in-depth interview is
conducted in an average length of 30 minutes to one hour. The interview is aimed to
give a further elaboration on current industry standing, as well as investigating recent
issues faced by the industry.
Result
The analysis of result will start with the development and confirmation of indicator in
the survey. Followed by sample profile explanation and plotted SPACE matrix result
and the strategy recommendation.
Survey development and confirmation
The variables used as a base for the initial interview was following Rowe et al. (1982)
and several changes have been made incorporating the suggestions from the experts.
The final variables comprise of the indicators FS, CA, ES and IS as listed in table 1.
Table 1. List of SPACE Matrix Factors
INTERNAL STRATEGIC POSITION EXTERNAL STRATEGIC POSITION
Financial Competitive Advantage Industry Strength Environmental
Strength (FS) (CA) (IS) Stability (ES)
Technological
Capital (CAR) Market Share Growth Potential
Changes
Loan Quality
Product Quality & Pricing Profit Potential Rate of Inflation
(NPL)
Loan (Growth) Customer Loyalty Financial Stability Interest Rate
Asset (Growth) Competition’s Capacity Technological Competitive
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Utilization Knowhow Pressure
ROA Technological know-how Resource Utilization Foreign Exchange
Productivity and
ROE Macro Economics
Capital Intensity
Liquidity (LDR) Regulatory
NIM
Cost Income
Ratio
After the expert interviews, two suggestions have been incorporated into the final
survey format. First, the study follows the suggestion to shorten the scale from 1-6
scale to 1-4 scale. The survey also accepts the suggestion to revise several indicators
for the matrix until internal and external indicators ready to be asked to respondents.
Measurement of Internal strength consists of Financial Strength (FS) measurement and
Competitive Advantage (CA). Financial Strength (FS) factor includes the question on
the capital situation of the bank indicated by Capital Adequacy Ratio, loan quality and
growth, return on asset (ROA), return on equity (ROE), liquidity ratio (LDR), net
interest margin (NIM) and costs to income ratio. Another factor measuring internal
environment is a competitive advantage (CA). The competitive advantage compares
the performance of the bank with the industry average in terms of market share,
product quality and pricing, customer loyalty, competition’s capacity utilization and
technological know-how.
External environment represented by two factors, industry strength (IS) and
environmental stability (ES). Industry strength factor is judged by growth and profit
potential of the industry, financial stability, technological know-how, the utilization of
resources and also productivity and capital intensity. While environmental stability
assessed the technological changes, the rate of inflation, interest rate, competitive
pressure, foreign exchange, macroeconomics conditions and the regulatory role.
After the confirmation of factors had been conducted, respondents were asked to
complete a questionnaire regarding the list of internal and external factors in table 1.
The study has completed 12 interviews with senior bankers from 12 banks in various
sizes.
Respondents’ profile
The respondents consist of senior level personnel with 10 to more than 30 years work
experience in banking industry. More than half of the respondents were in the age
range of 41 to 50 years old (67%) and the rest were above 50 years old. The
experience respondents have in the banking industry were various, 42% had 10 to 20
years experience and the rest have more than 20 years experience. Most of the
respondents interviewed were in the department head position (42%), followed by
division head position (25%) and commissioner (25%).
Succesful Management in Service Economy 761
Table 2. Respondents’ Profile
Number of
Percentage
respondents
41 to 50 years old 8 67%
Age 51 to 60 years old 1 8%
> 60 years 3 25%
10-20 years 5 42%
Experience 21-30 years 5 42%
≥ 30 years 2 17%
Department Head 5 42%
Position in Division Head 3 25%
Bank
Director 1 8%
Commissioner 3 25%
Plotted SPACE Matrix result
After the respondents assign the value of each variable, the average score is calculated
for each factor of SPACE, namely FS, CA, IS and ES. The x axes has FS and CA in different
pole and y-axes has IS and ES also in the different pole. The coordinate of each
respondent score was the resultant of each factor score (table 3). The score was then
plotted into the SPACE matrix diagram (figure1) thus determine each assigned
posture.
Table 3. Coordinate result
Banks’ Categorization Coordinate Posture
X axes Y axes
Category I:
1. Bank A 0.83 0.52 Aggressive
2. Bank B 0.80 0.38 Aggressive
3. Bank C -0.40 1.00 Conservative
Category II:
1. Bank D 1.00 0.19 Aggressive
2. Bank E 1.00 0.92 Aggressive
3. Bank F 0.93 2.57 Aggressive
Category III:
1. Bank G 1.17 1.03 Aggressive
2. Bank H 0.80 0.32 Aggressive
3. Bank I 0.50 0.89 Aggressive
Category IV:
1. Bank J 2.43 1.92 Aggressive
2. Bank K 2.10 1.22 Aggressive
3. Bank L 2.27 1.83 Aggressive
From the score, the study found that Environmental Stability is rated “fair” by the
respondents, similarly, the Competitive Advantage is also rated as “fair”. While
Industry Strength and Financial Strength, the respondents rate both “good”. This has
led most of the banks surveyed into Aggressive Posture. However, there is one bank
that has a different result and was categorized in the Conservative Posture of the
SPACE Matrix.
762 Strategica 2016
Figure 1. SPACE Matrix result
Figure 1 shows the matrix consisting of four quadrants, defensive, competitive,
conservative and aggressive postures. The circles are representing the banks surveyed
and their position within the matrix. The size of the circles is representing the banks’
category. The smallest ones are category I while the biggest circles are category IV.
According to the scores, most of the banks were in an aggressive posture. Only one
bank that has conservative posture.
Aggressive strategic posture
The interview score results in 11 out of 12 banks in the right-up quadrant, which led to
Aggressive Posture of SPACE Matrix. Aggressive posture characterized by attractive
industry with a stable economic condition. The organization can compete intensely in
the market as it is supported with strong financial resources.
In the SPACE Matrix result, most of the bank surveyed was in the aggressive posture
with a different position. In analyzing the bank, the discussion highlights on the bank
that has the maximum resultant score in each axes. The highest score for X axes, which
was the resultant of competitive advantage (CA) and industry strength (IS), was Bank
“I”. Whilst, the highest score for y axes was Bank “F”, which was the resultant of
financial strength (FS) and environmental stability (ES).
Bank “I”
In the matrix, a bank with the strong aggressive posture is “Bank I” in the far-up –right
quadrant. This bank is the one of the oldest, biggest banks in Indonesia in terms of
Succesful Management in Service Economy 763
asset and profitability. It started as a bank that caters mostly to the rural areas, now
the image is leveraged to more premium segments. In the past 10 years, this bank has
continued to develop its image and expand the network to Asian countries. The recent
move includes the launch of its own satellite, which marked the technological focus of
its operation. The aggressive strategy is very obvious to be pursued by this bank.
Bank “F”
Bank “F” has a unique position within the aggressive posture quadrant. It is located
above others in the matrix, signify its high score for financial and environment
stability. This medium-sized bank (category II) is the only bank in the research that
applies Islamic law in its operationalization. It has a parent bank that originates from
an old bank catered for pensioners. Bank F used to be a business unit of its parents’
bank, one of the fastest growing banks in Indonesia, before the business unit spin-off
become a new bank in 2008. This Islamic bank is a new set up in 2014. Its clear
differentiation of Islamic view in operationalization and support from the parent bank
provide a promising future growth.
In order to act upon the aggressive posture, there are tactics to be employed. First is to
invest in innovation to sustain and build competitive advantage. Innovation can be a
source to develop alternative competitive advantages and differentiated customers’
value proposition. A significant competitive advantage can raise the bar of the
industry, to a level that that competitors’ difficult to match. Second is to grow
aggressively. Seize opportunities by vertical or horizontal integration. Growth can also
be achieved by tapping into the new market which complements existing position by
acquisition, expanding market share or investing in products that have a competitive
edge.
Conservative strategic posture
The result found one bank in the conservative strategic posture, Bank “C”.
Conservative posture marked by unattractive industry in a relatively stable
environment.
Bank “C”
Bank C belongs to category I of Indonesian bank industry. The business of Bank C is
focusing on micro and small loans. This relatively small bank has undergone financial
challenge in this past couple of years. From the end of 2015, this bank has actively
downsized its staff and closing down 30% of its existing branch offices. The position in
the SPACE matrix reflects the situation and categorized its posture as conservative.
Along the efficiency measures, the bank also in the process of acquisition by a local
state company.
The organization in the conservative area usually lacks product or services with a
competitive edge. In this posture position, the organization should prune their existing
product lines, cut cost to improve cash flow and invest in search of new product
development with a competitive edge or try to enter a new market.
Size matters
From the result of 12 interviews, it is found that almost all of the banks’ directional
point leads to Aggressive Posture. The average coordinate is 1.1 for x axes and 1.07 for
764 Strategica 2016
y-axes. Interestingly, all of the bank in category 4 is performing way above the average.
This suggests that bigger banks might lead to more resources for aggressive action and
strategy. However, this suggestion might need further study.
Conclusion
The study started from the need to analysis the current state of play in Indonesia
banking industry. SPACE matrix method of analysis is selected to conduct the analysis
to target 12 banks in various sizes. The result of all banks interviewed has suggested
that most of the banks are in the aggressive posture. The posture defines by attractive
industry in stable economic condition. To act upon the posture is to maximize growth
by acquisition and innovation.
In addition, the positioning of the plotted matrix also gives interesting insights
regarding the banks’ size. The bigger the size of the bank (category 4), the more that
they are in the aggressive posture area (up and right quadrant). This might result from
the efficiency of the bigger banks in the industry and as an indication that size does
matter.
Although aggressive posture is the highly favorable position, there are concerns
related to the strategy implemented. The two main concerns of this position are, to
avoid complacency and to avoid anti-competition policies. In this posture, the threat
can also come from substitute market or as technology makes different sectors
converge. Since banking is a highly regulated industry, a bank that is too strong need to
have strict control to avoid complacency issues.
The study has given valuable insights toward the state of play of banking Industry in
Indonesia and practical suggestion for the strategy to be taken. It also contributes to
the literature with the application of Strategic Position and Action Evaluation analysis
in the banking industry. However, a limitation exists in the study. Although the study
had tried to represent the industry by the various size of the banks, the sample still
small compared to total players in the industry. Therefore the risk of
underrepresented made the analysis must be deal with cautions. Future research
should increase the number of sample and attention to respondent’s profile to give
more representation of the industry. It may also important to differentiate bank based
on characteristic, for example conventional and Islamic bank. Secondly, SPACE method
has evolved recently incorporating weight in the calculation. Future research should
also try to employ a newer version of SPACE analysis to provide more insights on the
result.
Acknowledgments: This research was supported by Indonesia Banking
School. We thanked our colleagues in the institution who provided insights
and advice in the process of writing this paper.
Succesful Management in Service Economy 765
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766 Strategica 2016
HORIZONTAL HOTELS AND SIMILAR ACCOMMODATION –
CLASSIFICATION AND FRANCHISING AS AN OPTION FOR THEIR
INTERNATIONAL VISIBILITY
Iva SLIVAR
Faculty of Economics and Tourism “Dr. Mijo Mirkovic” in Pula
1/1 Preradovićeva St., Pula, Croatia
iva.slivar@unipu.hr
Sanja DOLENEC
Hot Corner d.o.o.
19 Istarska St., Pula, Croatia
sdolenec@unipu.hr
Roberta KONTOŠIĆ
Smartinno Project
1/1 Preradovićeva St., Pula, Croatia
rkontos@unipu.hr
Abstract. While accommodation networks are an older concept, the idea of widespread
hotels (Italian Albergo / hotel diffuso) appeared in the 90s in Italy when abandoned
buildings after an earthquake in Friuli were renovated and managed as tourism
accommodations. Up to today, in Italy, there are 76 registered facilities of various
dispersed accommodation. This paper clarifies and denominates these types of
accommodation including accommodation networks and horizontal hotels (integrated
and widespread hotels) and tackles the issue of their prevalence. Namely, widespread
hotels and the less complex integrated hotels have almost not come to life beyond
national borders. Such hotels are in line with sustainable development and are extremely
interesting for today's consumers. The authors believe that the expansion of the concept
of horizontal hotels lacks a strong international brand. An analysis of the dispersed
accommodation according to spatial and pooling complexity dimensions is provided,
where a gap on the offer side is identified. This paper deals with the current state and
possibilities of development of horizontal hotels through pooling in international chains
in order to popularize them. An insight of horizontal hotels in Europe is also provided.
Keywords: widespread hotels; integrated hotels; horizontal hotels; hotel chains; pooling;
association; entrepreneurial opportunity.
Introduction
Horizontal hotels represent an interesting concept that is harmony with sustainable
tourism development. Considering they are a combination of hotel services and home
comfort, they are appealing to tourists. The paper deals with dispersed
accommodation, mostly horizontal hotels. The very little contribution has been found
within the theoretical and empirical field devoted to dispersed accommodation,
particularly widespread and integrated. This is where the novelty and originality of
Succesful Management in Service Economy 767
this paper can be recognized. Its contribution is twofold. Firstly, authors’ contribution
is recognized in providing theoretical systematization of dispersed accommodation.
Secondly, authors provide a model of the potential popularization of accommodation of
such kind. In the first part, the historical development of widespread hotels is
highlighted and its advantages are put into focus. The authors conclude by giving an
overview of dispersed accommodation based on spatial and joining complexity criteria,
where a gap on the offer side is identified. The aim of the paper is to raise the
popularity of integrated and widespread hotels beyond national borders.
Literature review
The National Association of Widespread Hotels and their classification
The National Association of Widespread Hotels (“Associazione nazionale alberghi
diffusi“) is an umbrella organization of widespread hotels on the national level in Italy,
but it also has one international member: the widespread hotel Hacienda Zorita in
London. The organization acts as a marketing association/consortium. Currently, in
2015 when the research was conducted, it counts 76 members.
The “Associazione nazionale alberghi diffusi” classifies their members as follows:
-Widespread hotels or alberghi diffusi doc
-Diffusive hospitality (subcategories: borgo albergo, residence diffuso and villaggio
albergo)
-Widespread hotels in villages
-Widespread hotels in the world.
Widespread hotels or alberghi diffusi will be further explained later on since they are
the most complex form of horizontal hotels.
Borgo albergo implies an inhabited village and a network of rooms and houses, even
far apart, made available to tourists, thanks to the centralized booking, but usually in
the absence of hotel services, unified management, and public areas. A residence diffuso
or widespread residence is a non-hotel accommodation, offering houses scattered in
an area sometimes very large, characterized by a central reservation, but not by a hotel
management, nor a unitary management of hotel services. A villaggio-albergo is an
accommodation realized thanks to the recovery, restoration, and enhancement for
tourism purposes of an uninhabited village managed in a unified form, which offers
rooms and services located in different buildings close to each other at times, and may
propose hotel services.
Widespread hotels in villages or Albergo diffuso di campagna has the same
characteristics as an albergo diffuso doc, but is located in rural context with a historical
and architectural value. The same applies to widespread hotels in the world.
The term “albergo diffuso” was coined in 1982 in the pilot project Comeglians, dealing
with the reconstruction of houses and abandoned villages after the earthquake in
Friuli Venezia Giulia, precisely in Carnia in 1976 where Professor Giancarlo D’Allara
was a consultant (Quaderno tecnico di BIC Lazio, 2007).
768 Strategica 2016
During the ‘80s in a few Italian regions were opened some accommodation networks,
primarily product, not market oriented since they were not unified in terms of quality
nor theme. The collaboration was based on the physical vicinity of holiday houses,
apartments and rooms, not on the similarity of the offer or their quality. They are
considered the antecedents of widespread hotels. A few partial widespread hotel
initiatives started during the 90s of last century.
The first definition of a widespread hotel was written in the project “Tourism” of the
local administration of the municipality of San Leo (Emilia Romagna) in Montefeltro in
1989 (Albergo diffuso, undated). An albergo diffuso was described as a uniform
accommodation unit that addresses tourist demand interested in staying in a valuable
urban context in contact with residents, availing, however, the use hotel services.
The first widespread hotel in the fully literal sense of the word, was the one opened in
Bosa (Sardegna) later on, in 1996, named “Corte Fiorita” (Albergo diffuso, undated). Its
main characteristics were described for the first time in the development plan of the
region Montana Marghine Planargia. This document was also used as the base of the
legal framework of widespread hotels as separate accommodation entities in Sardenia,
the first Italian region to regulate the legal prerequisites of widespread hotels in 1998
(Quaderno tecnico di BIC Lazio, 2007).
The concept of widespread hotel evolved into an innovative, demand-oriented model
of hospitality. A widespread hotel offers guests the possibility to experience life in
small villages in contact with residents but without having to give up hotel services. It
is a fusion that integrates the best of a hotel and a home.
A widespread hotel is a hotel that is commonly not built, instead, puts into function
existing buildings. The characteristics of a widespread hotel are more properties
situated in a historic center, walking distance from central facilities of approx. 300m,
common areas for guests and hotel services (reception, assistance, restaurant, cleaning
and maintenance) run by a unified management and the cohabitation of residents and
tourists.
Some of the advantages of widespread hotels include a good response to today’s
tourist demand, promotion of cultural heritage, reduction of seasonality, supporting
entrepreneurship and sustainable development. One of the main disadvantages is the
initial cost that is considerably higher due to the spatial dispersion of buildings
compared to one-building hotels. An albergo diffuso brings several positive socio-
economic impacts. Friendly towards residents, guests, preservation of the
environment, local products, tradition, architecture, and culture, it is consistent with
sustainable tourism development principles.
An Albergo diffuso supremely combines the “feeling at home” and the “feeling in a hotel”
model, illustrated in table 1.
Succesful Management in Service Economy 769
Table 1. Characteristics of Albergo diffuso (http://www.albergodiffuso.com/)
A widespread hotel is also a development model of villages: it animates and revitalizes
them, generates networks and supply chains and slows down migration to urban areas
(D'Allara, 2001). It revitalizes historical villages that may potentially risk
abandonment.
During the 90s, the idea aroused a great interest among public, private sector and
media in Italy (Quaderno tecnico di BIC Lazio, 2007) and further to the point the
widespread hotel model was the winner of “Global Award 2010” at WTM in London.
Building hotel chains
Except through direct ownership, hotels can form a chain through a franchise contract,
management contract and a lease or consortium contract (Moon, 2011). These are
some of the growth strategies hotel can choose whilst attempting to achieve
competitive advantage.
Franchising is a form of subcontract where an organization authorizes another
organization for the use of their brand and for selling their goods or services, including
single or all business functions. This contract is called Franchise Agreement. An owner
of a franchise is called a franchisor, and a recipient is called a franchisee. The
franchising fees can be categorized in: (Payne, L. and Perret, 2014) initial fees which
depend on the number of rooms and range from 200-1000 €; continuing fees such as
royalty fee which ranges from 2,5 – 5% of rooms revenue, advertising and marketing
contribution fee which ranges from 2 – 4% of rooms revenue, reservation fee which
ranges from 1-5% of room revenue, loyalty fee which ranges from 2-5% of the revenue
generated by the programme member and other „all in one“ fees. Franchisee benefits
from, operating under the name and reputation (brand image) of the Franchisor and
using its knowledge, skills, experience etc. One of the largest franchisors is Wyndham
(USA) (Ziedman, 2011), the hotels of which are present in the UK. Franchising is the
fastest growing business expansion strategy that has ever been created (Dimitar,
undated). The results of the study conducted by Moon (2011) showed that franchised
lodging firms have higher profitability and intangible value than non - franchised firms,
and indiscriminate expansion and low financial leverage can lead to poor financial
performance. Compared to an independent business, the franchise option has three
clear advantages for the franchisees (Diaz-Bernardo, 2009): 1) using an established
brand name that attracts customers, 2) working with a proven business format to
770 Strategica 2016
reduce the chances of failure, and 3) receiving initial and on-going training by the
franchisor on how to run the business.
The management company is an organization contracted by an owner of a hotel to
manage professionally the hotel in the name and for the account of the hotel. For
provision of its services, the management company receives compensation in the form
of management fees i.e. basic fee (income percentage), simulative fee (gross profit
percentage), marketing fee (percentage of the accommodation income), and booking
fee (fee for the turnover through a reservation system) (Byrne, Braun & Butler, 2012).
New Managerial contracts stand out as a trend. Owners are no longer concerned only
with the security provided by such contracts, but are rather well informed about the
advantages and disadvantages of such an approach and are familiar with a hotel's
operations. New contract clauses include innovative concepts, e.g. percentage of the
original stock (10-15%), guarantees for successful operation (if a set profit is not met,
the management compensates the difference), joint business deals, combinations of
hotel lease and percentage from operations and so on (Barge, 1993).
A hotel consortium is a marketing association of hotels where individual hotels keep
their proprietary independence and gain primarily marketing and sales support
through the economics of scale (e. g. favorable entry to GDS for members) (Fyall &
Garrod, 2005). They have been designed for independent hotels primarily, however,
more and more hotel chains do join consortiums. Consortiums are becoming more
complex and are using increasingly more sophisticated marketing support, which is
hardly affordable to small and independent hotels (Byrne, Braun & Butler, 2012).
Examples of hotel consortiums include leading hotels of the world, Special hotels of the
world. Design hotels, etc. For example, The Leading hotels of the world is a company
that offers online hotel booking services to luxury travelers, publishes a directory of its
member hotels. It also provides sales, marketing, promotional, advertising and public
relations support, distribution, and special program services for member hotels and
their guests through a network of sales and reservations offices worldwide
(Bloomberg, 2014).
The structure of the hotel industry according to affiliation, ownership and
management are summarized below.
HOTEL
AFFILIATION
NO
FRANCHIZING
FRANCHIZING
OWNERSHIP
INDEPENDANT FRANCHISOR INDEPENDANT
MANAGEMENT
MANAGEMEN MANAGEMEN
INDEPENDANT FRANCHISOR INDEPENDANT
T COMPANY T COMPANY
Figure 1. Structure of the hotel industry (Čizmar,
http://web.efzg.hr/dok/TUR/avlahov/01_3A_struktura%20hotelske%20industrije.pdf)
Succesful Management in Service Economy 771
There are many advantages and disadvantages of joining a hotel chain, yet 75% of the
one hundred biggest hotels are controlled by the top ten hotel chains (Das & Groote,
2008). The authors agree the most relevant advantages include miscellaneous savings
(in investment, marketing, supply), centralized management and control, an
advertisement for a hotel's destination, heftier foreign investments, better occupancy,
better guest structure and higher profitability. Disadvantages of joining a hotel chain
include difficulties in communication within a large system, complex and cost-
increasing control, overworked staff, disregard for the environment and local people
an unfavorable working climate.
An albergo diffuso can have are different types of ownership: a single, private owner;
the municipality as the owner or an association or cooperatives as owners. As
regarding the relationship between management and ownership, in Italy, 51% of
widespread hotels have a single management (no matter of the number of owners
involved), in 25% of cases ownership and management overlap and in 3% of cases
more owners represent also the management (Quaderno tecnico di BIC Lazio, 2007).
In the case of more owners, stipulating allotment contracts with them is an option of
single management. Cooperatives could be a good management model due to its multi-
stakeholder nature and it is possibilities of the provision of welfare services. The
greatest benefits of cooperatives are manifested in allowing people to work together to
create sustainable enterprises that generate jobs and prosperity and provide answers
to poverty and short-term business practices (International Co-operative Alliance,
2014). Widespread and integrated hotels present an interesting entrepreneurial
solution for the business’ cooperating with the others in order to achieve greater
competitiveness on the market. Involving different business subject from the local
community, as the hotel service must be delivered, encourages local entrepreneurial
activity.
Horizontal hotels and similar accommodation – research and classification
The table below shows the number of properties per category according to the
National association of widespread hotels in 2016. The empirical research was
performed by observation in May 2016, 2-6. As presented in Table 2, the biggest
concentration of units is in hotel diffusi doc (72).
Table 2. Number of facilities per category (adapted from http://www.alberghidiffusi.it/)
Category Number of facilities in Italy
Hotel diffusi doc 72
Alberghi diffusi di campagna 6
Ospitalita diffusa (Borgo albergo, Residenza diffusa, 8
Villaggio albergo)
Alberghi diffusi in the world 1
TOTAL 87
To repeat, Hotel diffuso doc offers a hotel service (reception, breakfast, cleaning, etc.)
24/7, has a guest space for common services and a single management. This type of
hotel must integrate territory and its culture because host community is present. That
is the reason why the environment is authentic. The distance between the units and
the common areas must be reasonable. Ospitalità diffusa is related and very similar to
alberghi diffusi. Borgo albergo is a result of valorization of an inhabited village and a
772 Strategica 2016
net of rooms, houses that can also be in distant locations. It is available to tourist
through a centralized booking, but without hotel services, single management, and
local community. Residenza diffusa offers houses sometimes located very far from each
other. It has a centralized booking, but it does not have hotel services and single
management. Villaggio albergo is realized thanks to recovery, restoration and
enhancement for tourism purposes of an abandoned village, managed in a unified
form. It offers rooms, services located in different but near buildings and it has hotel
service.
The authors find these classifications too similar, overlapping and not enough clearly
defined, therefore propose a new nomenclature and according to definitions (shown in
Figure 2).
Three main types of dispersed accommodation can be identified: accommodation
networks, integrated hotels, and widespread hotels. Accommodation networks are
merely a collection of various accommodations in one location driven by a joint
promotion and/or distribution and do not necessarily respect the “within walking
distance” principle. Horizontal hotels are an umbrella term for integrated hotels and
widespread. They refer to spatially dispersed hotel businesses. An integrated hotel is a
less complex form of accommodation, which implies the existence of hotel services no
matter of the local community or reasonable walking distance. While the concept
widespread hotels or albergo diffuso remains unmodified.
Figure 2. New framework for the classification of horizontal hotels and similar
accommodation models
While alberghi diffusi doc and alberghi diffusi in campagna are obviously widespread
hotels, villaggio albergo is a type of integrated hotel (which doesn’t have to be
composed of renovated buildings) while Borgo albergo and Residenza diffusa are
accommodation networks, as they don't offer a hotel service, but they only share
marketing and distribution.
To sum up, the National association of widespread hotels has no common term for all
the proposed accommodation types that have proliferated on the basis of
accommodation networks and widespread hotels, therefore the syntagma “dispersed
accommodation” is introduced. Furthermore, the name of the umbrella association has
overgrown itself.
Succesful Management in Service Economy 773
Within the European legalization, Croatia has made a step forward to the recognition
of such accommodation introducing in its legislative two categories: widespread hotels
and integrated hotels. Namely, in 2014, the Croatian Ministry of tourism makes it
possible to categorize widespread and integrated hotels. Both accommodation
facilities provide the same services: accommodation, breakfast and other catering
services and common facilities: reception desk, common toilet, lounge... Moreover,
integrated and widespread hotels include minimally three properties. The main
difference between them is that widespread hotel is mostly located in old, traditional,
historical, and rural – urban structures and are furnished in the traditional way while
integrated hotels are made of units that are previously categorized. The introduction of
these accommodation facilities aims at fostering private sector accommodation. As this
is a new program in Croatia up to now, there are a few integrated hotels (e.g. Zagreb,
Dubrovnik, Šibenik) and a few widespread hotels in development (Poreč, Split, Završje,
to name a few) along with the first, Ražnjevića Dvori in Polača Village.
Integration of horizontal hotels in international hotel chains through franchising
The analysis of horizontal hotels (widespread and integrated hotels) showed that the
current only organization of horizontal hotels (Associazione Nazionale Alberghi
Diffuse) is not sufficient for the global popularity of the concept (our analyses showed,
these hotels are mainly present in Italy), as it acts as an association of various
dispersed facilities and classifies them only as different types of accommodation
neglecting their quality (hotel stars and brand standards). Furthermore, the
presentation of similar accommodations creates an even greater confusion with the
term “widespread hotel” that has yet to be popularized and is misunderstood with
similar terms. The authors suggest the solution lays in the standardization of
operations and visibility that international hotel chains provide. Minimal standards of
hotel services are what may be the standardized e.g. frequency of quick cleaning /
maintaining, type of serving in hotel restaurant etc. Considering the diverse structure
of ownership and management of horizontal hotels, integration through franchising is
advocated. It would provide a uniform quality of services, however, simultaneously;
special attention has to be paid to authenticity and local specificity, which makes
franchising a challenging task.
Widespread hotels and integrated hotels are in most cases examples of pooling per se
which operate at the local level. Gradation according to the spatial component is
illustrated on the y-axis, while the x-axis gives an overview of the complexity of
pooling:
-proto level of pooling – the common functions that are associated are marketing and
sales (accommodation networks, marketing alliances or consortia)
-partial pooling – association of more than marketing and sales functions e.g.
integrated hotels
-majority pooling – most functions are common e.g. franchises and widespread hotels
-total pooling (takeovers, mergers) – can be horizontal, vertical and diagonal.
774 Strategica 2016
Figure 3. Current state and pooling opportunities of horizontal hotels in order to popularize
them
Figure 1 shows the current connection of accommodation networks, integrated and
widespread hotels - and their associations in marketing alliances / consortia
(Associazione Nazionale Alberghi Diffusi). It is evident that in the market there are no
chains of horizontal hotels that represent a new entrepreneurial opportunity (dashed
in figure 3). This could be of potential interest to existing horizontal hotels facilities,
international hotel chains, and corporations. Widespread hotels and integrated hotels
respectively, in order to be recognized internationally, necessitate a flagship hotel that
would set the base of the future hotel chain of integrated and widespread hotels. Given
that the reason of association of accommodation networks is only their location, it
makes no sense to pool this type of accommodation into chains.
Thus, horizontal hotels may be associated with hotel chains of horizontal hotels and
those chains can be re-enrolled in prestigious, adequate collections of hotels
(marketing alliances / consortia). It is also possible that the chain of horizontal hotels
becomes part of an international corporation.
Conclusion
This paper contributes in the clarification of similar terms related to horizontal hotels
and provides also a classification of dispersed accommodation. The authors have
introduced the notation of dispersed accommodation and redefined the term
horizontal hotels. The main benefits of such forms of accommodation have a great
potential for fostering socio-economic activity and, some forms also, of revitalizing
almost abandoned villages.
Furthermore, horizontal hotels were also classified according to their spatial
dimension and complexity of integration. Widespread hotels are examples of
Succesful Management in Service Economy 775
associations in tourism at the lowest level in the spatial context. However, in terms of
organization, they are far more advanced than accommodation networks and
integrated hotels. The combination of those two dimensions revealed there were no
chains of just horizontal hotels, which represents a gap on the offer side.
The results of the conducted empirical research revealed that there are only 87
dispersed accommodations according to the National Association of Widespread
hotels, currently, the only organization in Europe that acts as the representative of all
dispersed accommodation as a marketing consortium. Most hotels are situated in Italy,
demonstrating that the first step towards the expansion of this accommodation model
lays in the legislative in order to recognize the different kinds of facilities, which is
visible from the Croatian case. A step forward would be the inclusion of horizontal
hotels in hotel chains. Since horizontal hotels (namely, widespread hotels and
integrated hotels) as opposite to accommodation networks, provide also unified
hospitality services, they can be affiliated with hotel chains, by franchising, in order to
be more visible internationally.
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Succesful Management in Service Economy 777
UNDP (undated). Albergo diffuso. Developing tourism through innovation and tradition.
Retrieved from http://www.albergodiffuso.com.
Ziedman, P.F. (2011). Global Franchise Expansion: Strategies for Lucrative and Planned
Growth. Retrieved from
http://sri.candriam.com/LibrarySRI/can_SRI_lodgingIndustry_DEF.pdf.
778 Strategica 2016
EXCLUSIVE VS. NON-EXCLUSIVE DISTRIBUTORS.
A CASE STUDY OF ELEVATOR INSTALLATION & SERVICE INDUSTRY
IN ALBANIA
Mimoza MANXHARI
University of Tirana
183 Square "Mother Teresa", Tirana, Albania
mmanxhari@yahoo.com
Rezarta HASANAJ
University of Vlora “Ismail Qemali”
L. Pavarësia, 9400 Vlorë, Albania
rezarta.hasanaj@gmail.com
Abstract. The evaluation of the performance of distribution channels often has its focus
on both ends of its extremes: manufactures performance and consumers benefits. Ways in
which these companies operate in the market will affect their performance. One of the
most important stages of this process is the distribution channel and distributors, find it
necessary to evaluate their performance. The paper starts with the importance of
distribution channels. Decisions about the structure of the distribution channel are
important in at least two dimensions. First, the decision has a direct effect on pricing
policy, advertising, packaging, etc. Second, decisions regarding distribution channels
require a long-term commitment. It takes several years to be deploying a desired
distribution system and can’t be changed easily. Distribution means delivering the
product to the consumer at the right time and place. Thus, a company must decide the
number of distributors needed on each channel while using different distribution
strategies. Distribution channels always include the manufacturer and the final
consumer, the main duty of distribution system that places goods to a potential customer
is to be at the right time and place. Thus, an evaluation of the performance of distributors
is done considering both the manufactures performance and consumers benefits. In this
study, two kinds of distributors are considered, exclusive distributor, ED and non-
exclusive distributors, NED. The focus of the paper is an Elevator Installation & Service
Industry in Albania while looking at three significant elements of the distributors:
rationalization, communication, and perceived performance. The paper was qualitative
and empirical data were collected through questionnaire and in-depth interview. SPSS
was used in analyzing the data gathered from the sample (13 respondents from 22). The
study revealed that even though ED agreements are characterized by an asymmetric
power structure, data shows that producers and ED tend to have with each other a more
stable and closer relationship compared to NED. In addition, the positive result of
evaluation performance and commitment of ED is higher than NED. Their commitment is
seen in the form of investments in the exclusive distribution channel. This commitment
motivates producers to consider ED.
Keywords: distribution channels; non-exclusive distributors (NED), exclusive distributors
(ED), performance.
Succesful Management in Service Economy 779
Introduction
The starting point of this paper is the term distributors, distribution channels, and its
meaning. Who are the distributors? The words distributor encompass a wide range of
different means and refer to different people. There are basically two different types of
distributors. At one end of the spectrum, there are general distributors who can
provide a variety of different goods in different geographic regions. On the other side,
there are specialist distributors that offer information and technology services and
applications of handful products. Public Distributors titles like wholesaler, distributors
of general shopping, association distributors, storekeeper distributors (Kotler &
Armstrong, 2012).
Components of distribution networks include manufacturers and importers of goods
to networks; wholesale that is an intermediary between producers and final
distributors; exclusive agent; retailers that are the final supplier of goods and services
to consumers; on sale at retail; other elements of the retail distribution; a consumer
that export goods from storage and use.
Distribution channels are more than simple collections of firms tied together by
various flows. They are complex behavioral systems in which people and companies
interact to accomplish individual, company, and channel goals. Some channel systems
consist only of informal interactions among loosely organized firms. Others consist of
formal interactions guided by strong organizational structures. Moreover, channel
systems do not stand still new types of intermediaries emerge and whole new channel
systems evolve. A company’s work does not end with the production of a product. One
of the most important stages of this process is the distribution channel.
The term “distribution channels” is a collection of affiliate organizations and
individuals that place product or service to end-customers. Distribution channels
connect the goods producers and customers to each other. The simplest method is
direct sales but it may not be possible and also the intermediaries are used. Severity
level selection and extent of distribution can affect the number of intermediaries.
Intermediaries form the components of the distribution channel. Companies can
choose a distribution channel or a combination of different channels to reach their
consumer while achieving an optimal dispersion with each channel reaching a
different segment of customers. Distributors can help generate sales; however, the
company tends to lose that direct contact that it has with its customers. Thus, a
company must decide the number of distributors needed on each channel while using
different distribution strategies.
One of these strategies is the exclusive strategy, where the number of distributors is
limited. It is used when a company wants to have control over the service provided by
the resellers. Often this strategy includes exclusive agreements for a specific territory
where the producer and reseller both benefit from it. This brings about a stronger
partnership between seller and reseller and results in strong bonds of loyalty. Part of
the agreement usually requires the dealer not to carry competing lines, and the result
is a more aggressive selling effort by the distributor of the company’s products, e.g. an
exclusive franchise to sell a vehicle brand in a specific geographical area, in return for
which the franchisee agrees to supply an appropriate after sales service back-up.
780 Strategica 2016
Exclusive agreements are among the most used forms of contractual relations). Little
attention has been given to these agreements; thus, little is known about the impact
they have on the contractual performance of distribution channels. Unlike non-
exclusive agreements (NED), exclusive agreements refer to a form of distribution
channel in which contractors use only the product of the manufacturer or provider,
furthermore, they are not allowed to use products of competitor producers (Besanko &
Perry, 1994). Operating conditions of ED differ from those of the NED. Often the choice
to operate as ED is a choice of their own for the following reasons (Scherer, 1980):
-To be able to gain the right of distribution or use of the product.
-To take advantage of the reputation of the manufacturer.
-To gain assistance in terms of different disciplines like management and finance from
the manufacturer side.
A distributor cooperating with one manufacturer creates a dependent relation from
that manufacturer. This manufacturer has a considerable power in relation to ED
regarding the decision in distribution channels. Asymmetric impact of power is a
characteristic of the way ED operate (Dant & Berger, 1996). Examples of this form are
found in the different industries such as automobile manufacturing, construction,
production of soft drinks in trade sector etc.
ED agreements bring different impacts on the behavior of the intermediaries,
operating on exclusive agreements. A question that needs to be addressed is: Does the
performance of ED and NED differ from one another?
This study is focused on how ED agreements affect the perception of intermediaries in
three main directions: rationalization, communication, and perceived performance. A
discussion will follow discussing why these elements were chosen and the importance
of each one. In this paper, a revision of the literature related to ED will be introduced,
following the hypotheses build, following the methodology for collecting and
processing the data and the end the results of the study including limitations will be
present.
Literature review
Anderson and Weits (1992), view ED agreements as a preventative form of
involvement in the distribution channels. They estimate that there are positive
correlations between ED relations and engagements of actual distributors in the
relationships created among members of the channels. Sengupta (1995) estimates that
investments in assets promote ED agreements, while technology developments reduce
the possibility of using these agreements. In his literature, Sangaputas’ focus is mostly
on horizontal relationships between firms. The legal and economic literature
emphasizes the lack of competition that these agreements form barriers to entry and
expansion of potential intermediary distribution channels; thus, increasing the cost of
entry into the market (Bolton, 1987).
However, as quoted above, ED offers several competitive advantages over NED. Such
advantages are:
1. ED agreements encourage resellers to focus on selling a product, by educating
distributors about the brand. This is difficult to accomplish in NED.
Succesful Management in Service Economy 781
2. ED agreements enable quality control of the product, while in NED agreements do
not.
3. ED agreements do not allow any leak of the company’s products.
4. Creates high dealer loyalty and considerable sales support
5. Limits potential sales volume
6. ED relations stimulate investors to invest more in distribution channels operating in
a less risky environment (Sass & Gisser, 1989).
All these features are reached by the continuous support from the management,
promotion, training, technical knowledge etc.. (Burnett, 2012; Steuer, 1983).
Hypotheses
Rationalization
ED's success is closely linked to the production line of the main producer. Even though
distributors operate under the ED or NED, they have the right to employ as many
distributors they find necessary. ED are more dependent on their producers compared
to NED. Therefore, producers that contract ED have greater power over them
compared to producers that contract NED, where an opportunistic behavior is shown
from the manufacturers that use ED.
This opportunistic behavior is seen to have exploitative tendencies, and the party with
more power aims to have more opportunistic behavior by benefiting more from the
resources (Kale, 1989). Walker, 1981, found that the most powerful party aims to have
opportunistic behavior during the negotiation process. This behavior can increase
conflicts among members of the channels pushing manufacturers toward their
personal interests. Taking into consideration this aspect, the level of rationalization
will be lower in ED channels than NED channels. Rationalization refers to the long term
mutual relationship (Kaufmann & Dant, 1992). Rationalization is used to measure the
quality and nature of the dynamics of relations and processes between firms (Dant &
Schul, 1992).
Arguments suggest that manufacturers that used ED have a reduced level of
opportunistic behavior compared to manufacturers that use NED. They are
collaborative and rational.
Two factors support this argument:
1. Economic and legal literature suggests that manufacturers become part of the
agreement to capitalize loyalty and to gain attention from ED at the same time keep
away competitors from using the current distribution channels (Bolton, 1987). To
secure these benefits manufacturers should adopt a long-term relationship with ED.
ED agreement will be created as a form of a partnership, or as a form of an alliance that
shares profits and losses. NED are not motivated to build lasting rational relationships.
2. Mutual relations theory supports the fact that an action taken by a party to the
relationship ED, will be reciprocal by the other party (Kelly, 1983). Anderson and
Weitz (1992) claim that these accepted agreements of ED, affect positively the
782 Strategica 2016
perception of producers about the commitment of ED. Therefore, providers prefer to
invest in ED channels than in NED channels (Shaffer, 1993).
Following these arguments we build the first hypothesis:
H1. The level of rationalization will be higher in ED compared to NED.
Communication
A channel of distribution by its very nature is made up of people. Ideally, a channel
member should coordinate his or her efforts with other members in such a way that
the performance of the total distribution system to which he or she belongs is
enhanced. This is rarely the case. Part of this lack of cooperation is due to the
organization structure of many channels, which encourages a channel member to be
concerned only with channel members immediately adjacent to them, from whom they
buy and to whom they sell. The dimension of communication has been incorporated
into the study.
Channel communication is sending and receiving information that is relevant to the
operation of the channel. It is critical for the success of the channel member to work to
create and foster an effective flow of information within the channel. Communication
in the distribution channels may be a one-way or two-way (Mohor, Fisher & Nevin,
1996). Communication refers to the extent in which the members of the channel share
information with each other in a proactive manner (Anderson & Narus, 1990).
Communication is perceived as a critical element in the distribution channels, while it
represents the means by which business transactions are coordinated, and cultivate
trust among the members of the channel (Nevin, 1990). Because of the different
hierarchy levels within the distribution channels, various studies emphasizing one-
way communication (Dansereau & Markham, 1987), making ED dominate in the
communication process.
A two-way communication is considered to be an effective communication tool for the
coordination of activities between the parties (Mohr, Fisher & Nevin, 1996). Studies
show that ED is more likely to invest in relationships with their manufacturers, thus,
increasing competitiveness in the market (O’brein & Shaffer, 1993).
H2: Communication of ED firms is at higher levels compared to the communication of
NED firms.
Perceived performance
Perceived performance is defined as a general assessment of the performance of a
party done during the cooperation with another party. The evaluation of the
performance of the distribution channels is believed to have a strong impact on the
creation of relationships between members (Campbell, 1997). The nature of the
agreements of ED does not allow them to use or sell the products of competitors,
limiting the range of products, compared to NED. From the perspective of
opportunistic behavior, the manufacturers will benefit more from the agreement. This
theory evaluates the performance of sellers ED perceived to be at low levels.
According to Kelley (1983), the theory of reciprocity will compensate ED for not using
or selling competitors' products (Sass & Gisser, 1989). Because of the product
differentiation, ED will generate higher profits (Besanko & Perry, 1994). ED retailers
Succesful Management in Service Economy 783
could operate more efficiently compared to NED. This logic suggests the following
hypothesis:
H3: Perceived performance of producers about ED channels is higher than the perceived
performance of NED channels.
Methodology
To test the above hypothesis, we selected the elevator installation and service industry
in Albania. We found both forms of distribution channels ED and NED. In addition, we
choose a sample of companies that sell, install and repair elevators in Albania.
Addressing QKR, Vlore which provides online access on a national level, we were
provided a list of businesses that offer these services. Companies were selected based
on the description of the product/service they offered. From the completion of the
questionnaire, it was observed that very few firms offering other products. As a
consequence, the possibility of leaving out of the study other firms is small.
Sample selection
Data selection was a two steps process. First, a total number of 22 companies were
selected and contacted via email. From those, only 13 responded. Then a survey was
distributed via email. From the data collected, the companies were divided into two
groups ED (5 firms) and NED (8 firms). This division was made possible due to the
nature the questions had. Companies were requested to answer all of the survey
questions relate to the three hypotheses raised above. For data analysis was used
Statistics F (Fisher) and SPSS.
Model setup
The tree variables used were rationalization, reciprocity, and perceived performance.
Rationalization depends on three norms: reciprocity, solidarity, and integrity (Dant &
Schul, 1992). Reciprocity refers to the extent parties share in a fair and equal way their
losses (Boyle et al., 1992). Solideratiti refers to the extent both parties value long term
relationship. Integrity refers to the extent the relationship between the parties is
valued beyond the transaction. In the communication section, questions that highlight
issues of one-way and two-way communication were addressed. The perceived
performance was addressed with three questions. Likert scale rating was used, 1-5, 1-
not at all and 5 fully agree.
Analysis
Table 1. Data on the number of ED/NED firms
No. Description Number Total Percentage
1 Total firms 22 100%
2 Firm – fills the questionnaires 13 59%
3 ED firms- fills the questionnaires 5 38%
4 NED firms- fills the questionnaire 8 62%
From the data given, it is noted that 62% of respondents, operate as NED, while 38% operate as
ED.
784 Strategica 2016
Table 2. Collaboration between members of the distribution channels)
Purchase Design of Technical
No. Description technical the Training support, legal, Financing
parts elevators finance. etc
1 ED firms 100% 100% 80% 75% 60%
2 NED firms 100% 100% 0% 10% 0%
Two of the main functions of ED and NED are purchase and design. The table shows
that there is not a noticeable difference between the two functions they provide. The
difference is that the makes 50% of design is done by NED. The rest is made possible
with the help of alliances 50% or by the manufacturer 40%.
In relation to other important functions like training, financing, technical support, ED
benefit from their providers more than NED.
Table 3. Product offered from ED and NED firms
No. Description Installment Maintenance Modernization Design
1 ED firms 100% 80% 100% 100%
2 NED firms 100% 100% 0% 100%
Table 4. Consumers segment of ED and NED firms)
Residents- Public Shopping
No. Description Other
Hotels transportation centers
1 ED firms 100% 80% 100% 50%
2 NED firms 100% 0% 0% 0%
Table 5. Number of producers NED and ED firms
Number of
Number of Number of Number of
No. Description producers, >
producers, 1 producers, 2 producers, 3
3
1 ED firms 100% 0% 0% 0%
2 NED firms 50% 25% 25% 0%
ED operate in larger segments compared to NED. It is worth mentioning that at the
beginning of their activity, NED operates with only one producer 50% of the cases.
Despite that, the relationship of NED is not regulated by an exclusive agreement. The
number of producers who collaborate with NED is relatively low.
The dimensions of the three variables to test the three hypotheses were grouped as
follows. They were evaluated by Likert scale.
Rationalization
1. Reciprocity
-In relation to the manufacturer, one party benefits more than deserved.
-Each benefit on the basis of the contribution provided.
-Distributors help more the producers than they help them.
-Cost and Benefit balance over time.
Succesful Management in Service Economy 785
2. Solidarity
-Consider the manufacturer they collaborate with the same as any other manufacturer.
-The relationship is considered long-term.
-The relationship is considered ongoing process of collaboration.
-The relationship is considered as a group of collaboration for each project.
3. Integrity of roles
-Manufacturer discusses with your firm, not only for the purchase and sale of the
product
-Expectations between the parties are complex and do not only concern business
relations.
-Roles are separated: you are the buyer and they are the seller.
-Manufacturer satisfies the requirements of the firm in relation to quantity, delivery
conditions, and price (Dant & Schul, 1992).
Communication
-Inform each other about events that may affect the activity of firms
-Often informal information exchange.
-Exchange information beyond what is in the agreement.
-Expected to be informed about any situation that affects your work by the
manufacturer (Nevin, 1990).
Perceived performance
-Your relationship is productive.
-Investment in energy, time, and assets is productive.
-The relationship is satisfactory (Campbell, 1997).
To interpret the results of hypotheses tested, a summary of the data given was done
and how they operate in the market. ANOVA analysis of variance was used to analyze
each of the three variables.
Table 6. Averages and hypothesis
Hypothesis/ Variables Average ED Average NED
H1: Rationaliziation 3.6 3.1
H2: Communication 3.4 3.1
H3: Perceived performance 3.8 3.7
The above table shows that the average of ED is higher than the average of NED when
looked at the first variable, rationalization. The highest value of the average belongs to
the integrity of roles as part of the rationalization. To evaluate whether this difference
is important to prove hypothesis 1, test F is used. Test F results higher than the critical
value for the three hypotheses. Specifically F1 = 8, 7, F2 = 8.1 and F3 = 7, for F critical =
4:55, thus, proving the three hypotheses.
Data analysis shows that firm size does not affect the three selected variables. Fisher
test results are lower than the critical value: the results from the averages confirm the
same result.
786 Strategica 2016
Conclusion
To conclude, as mentioned above, decisions about the structure of the distribution
channel are important. Distribution means delivering the product to the consumer at
the right time and place. The products are delivered using distribution channels which
are more than just a simple collections of firms. They are complex behavioral systems
in which people and companies interact to accomplish individual, company, and
channel goals. Some channel systems consist only of informal interactions among
loosely organized firms. Others consist of formal interactions guided by strong
organizational structures. Most producers use intermediaries to bring their products
to market. They use a set of interdependent organizations in the process of making a
product or service available for use or consumption by the consumer or business user.
This process is what has been known as a distribution channel. A company must decide
on the distribution channel and the number of distributors needed on each channel
while using different distribution strategies. Distribution channels always include the
manufacturer and the final consumer. This paper discusses two kinds of distributors,
exclusive distributor, ED and non-exclusive distributors, NED. The focus of the paper is
an Elevator Installation & Service Industry in Albania while looking at three significant
elements of the distributors: rationalization, communication, and perceived
performance. SPSS was used in analyzing the data gathered from the sample (13
respondents). This study compared Ed to NED using as sample elevator installation &
service industry to test the hypothesis. Even though ED agreements are characterized
by an asymmetric power structure, data shows that producers and ED tend to have
with each other a more stable and closer relationship compared to NED. In addition,
the positive result of evaluation performance and commitment of ED is higher than
NED. Their commitment is seen in the form of investments in the exclusive distribution
channel. This commitment motivates producers to consider ED. Moreover, ED do not
show opportunistic behavior, making them more attractive.
Limitations
These intriguing findings should be interpreted with some caution, however. First, we
only sampled companies in the elevator service industry. These companies do not
represent all the forms of ED and NED. Second, the number of the companies that took
part in this study is relatively small.
Future research should take into consideration the consumers to test the relationship
between ED/ NED and consumers, making the study more complete and reliable.
References
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Working Partnerships. Journal of Marketing, 54(1), 42-58.
Besanko, D., & Perry, M. (1994). Exclusive Dealing in a Spatial Model of Retail
Competition. International Journal of Industrial Organization, 12(3), 297–329.
Succesful Management in Service Economy 787
Boyle, B.F., Dwyer, F.R., Robicheaux, R.A., & Simpson, J.T. (1992). Influence Strategies in
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Campbell, A.J. (1997). What Affects Expectations of Mutuality in Business
Relationships? Journal of Marketing Theory and Practice, 5(4), 1-11.
Dansereau, F., & Merkham, S. (1987). Subordinate Communication: Multiple Levels of
Analysis. Academy of Management Journal, 30(1), 91-109.
Dant, R.P., & Berger, D. (1996). Conflict Resolution in Processes in Contractual
Distribution Channels. Journal of the Academy of Marketing Science, 25.
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Dant, R.P., & Schul, P.L. (1992). Conflict Resolution Processes in Contractual Channels
of Distribution. Journal of Marketing, 56(1), 38-54.
Kaufmann, P.J., & Dant, R.P. (1992). The Dimensions of Commercial Exchange.
Marketing Letters, 3(2), 171–185.
Kotler, P., & Armstrong, G. (2012). Principles of Marketing, 14th edition. Boston: Pearson
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Relationships. Journal of Marketing, 60(3), 103-115.
O’Brein, D.P., & Greg, S. (1992). Non-Linear Contracts, Foreclosure, and Exclusive
Dealing. Retrieved from
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Law and Economics, 32(2), 381-400.
Scherer, F. (1980). Industrial market structure and economic performance. Chicago:
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http://www.schindler.com/com/internet/en/investor-relations/reports.html.
http://www.weatherfordannualreport.com/our-2015-direction/client/increasing-
well-production-with-industry-leading-lift-solutions/.
788 Strategica 2016
MEASURES TO SUPPORT THE SMALL BUSINESS ACT
INITIATIVE IN SLOVAKIA IN THE FIELD OF INNOVATION
Ľubica LESÁKOVÁ
Matej Bel University
10 Tajovského, 97590, Banská Bystrica, Slovakia
lubica.lesakova@umb.sk
Peter LACO
Matej Bel University
10 Tajovského, 97590, Banská Bystrica, Slovakia
peter.laco@umb.sk
Abstract. The strategic aim of all businesses in the European Union is to increase their
competitiveness. Especially the development of small and medium enterprises requires a
complex and coordinated approach from all the authorities concerned. Problems
concerning entrepreneurial activity, entrepreneurial environment and especially the
small and medium enterprises come to the front nowadays in all European countries. The
stated problems were projected into several strategic initiatives that define policies of the
European Union in concrete spheres. The starting point is “Strategy Europe 2020” that is
a basic strategic development document of the European Union. For the sphere of small
and medium enterprises, there is a key initiative “Small Business Act for Europe” (SBA).
Implementing SBA represents the key appeal for the European Union and its member
countries within the support of small and medium entrepreneurial activity. The aim of
the paper is to present the innovations as one of the basic principles of the Small Business
Act for Europe, to evaluate the results of implementing Small Business Act incentives in
Slovakia in the field of innovation, to identify the main problems the Slovak small and
medium enterprises perceive as the barriers to developing innovation activities and to
formulate the main measures to be taken to improve the state in the mentioned area.
Following the aim of the paper, a set of research questions will be formulated. For the
research purposes, we will utilize results of own empirical research as well as relevant
secondary data. To fulfill the settled aim several scientific methods of examination,
namely the method of analysis, synthesis, induction, deduction as well as statistical
methods will be used.
Keywords: Small Business Act; small and medium enterprises; innovation; measures;
Slovak Republic.
Introduction
To bring Europe back to growth and higher levels of employment Europe needs more
entrepreneurs. Problems concerning entrepreneurial activity, entrepreneurial
environment and especially the small and medium enterprises (SME) come to the front
nowadays in all European countries. The stated problems were projected into several
strategic initiatives that define policies of the EU in concrete spheres. The basic
document is represented by the “Strategy Europe 2020” that is a basic strategic
Succesful Management in Service Economy 789
development document of the EU. For the SMEs sector, there is the key initiative “Small
Business Act for Europe”. Implementing Small Business Act for Europe (SBA)
represents the key appeal for the European Union and its member countries within the
support of small and medium entrepreneurial activity and creation of a suitable
entrepreneurial environment, as well for the smallest enterprises.
SBA creates a new political framework that includes political and economic tools in the
field of support of entrepreneurial activity. It consists of a set of ten principles that lay
down the measures for the support of SME in varied fields.
Principle 1: to create an environment in which entrepreneurs and family businesses
can thrive and entrepreneurship is rewarded.
Principle 2: to ensure that honest entrepreneurs who have faced bankruptcy quickly
get a second chance.
Principle 3: to design rules according to the principle “think small first”.
Principle 4: make public administration responsible to SMEs needs.
Principle 5: to adapt public policy tools to SME needs: facilitate SME participation in
public procurement and better use State Aid possibilities for SME.
Principle 6: to facilitate SME access to finance and develop a legal and business
environment supportive to timely payments in a commercial transaction.
Principle 7: to help SME to benefit more from the opportunities offered by the Single
market.
Principle 8: to promote the upgrading of skills in SME and all forms of innovation.
Principle 9: to enable SME to turn environmental challenges into opportunities.
Principle 10: to encourage and support SME to benefit from the growth of markets.
These principles have to be respected when suggesting the measures of complex
character aimed at the support of SME´s development in the EU member countries.
Implementation of measures of the Small Business Act is inevitable for reaching
progress in the relation to ensuring favorable and motivating entrepreneurial
environment.
The aim of the article is to present the innovations as one of the basic principles of the
Small Business Act, to evaluate the results of implementing SBA incentives in Slovakia
in the field of innovation, to identify the main problems the Slovak small and medium
enterprises perceive as the barriers to developing innovation activities and to
formulate the main measures to be taken to improve the state in the mentioned area.
For the research purposes, we will utilize results of own empirical research as well as
relevant secondary data. Following the goal of the paper we have formulated a set of
research questions:
What is the state (the results) of implementing SBA incentives in Slovakia in the field of
innovation?
What are the main problems the Slovak SME perceive as the barriers to developing
innovation activities?
What are the main measures to be taken to improve the state in the mentioned area?
790 Strategica 2016
State of implementing SBA initiative in SMEs in Slovakia in the field of innovation
The government of the Slovak Republic (SR) promised to implement the European
principles for the development of small and medium entrepreneurship by means of the
initiative of SBA in Slovakia. Exhaustive implementation of EU strategic initiatives for
the support of the development of SME in Slovakia is in charge of the Ministry of
Economy of the SR and of the Small Business Agency of the SR, which is also the body
responsible for the monitoring of SBA implementation.
In 2013 a dedicated SBA working group was set up to ensure that the SBA is
implemented properly. The activities of the work group include a preparation and
implementation of significant measures and policies in the area of SME development,
consultations on recommendations and tasks of the EU and preparation of measures
supporting SME growth with the aim to maintain sustainable SME growth. The group is
made up of representatives of the Slovak Business Agency and 10 ministries with
responsibilities relating to SMEs.
The Slovak government intends to implement the SBA under its SME development
strategy, which is due to run until 2020. At this time the strategy is still in preparation.
The strategy is intended to be the first document focused directly on SMEs. It will
include the Slovak authorities´ response to the SBA, the Europe 2020 strategy, and the
Entrepreneurship 2020 action plan. The strategy will need to be aligned with the EU
cohesion policy 2014-2020.
One of the main tools the European Commission uses to monitor and assess countries´
progress in implementing the SBA is the SME Performance Review. The review brings
comprehensive information on the performance of SMEs in EU countries and nine
other partner countries. It consists of two parts: an annual report on European SMEs
and SBA country fact sheet.
According to the SBA Fact Sheet Slovakia´s profile was in 2014 mixed with
comparative strengths in environment and access to finance and with weaknesses in
“second chance”, “responsive administration” as well as in “skills and innovation”. The
biggest challenge is internationalization.
Succesful Management in Service Economy 791
Figure 1. Slovakia´s SBA profile in 2014 (European Commission, 2015a)
One of the main reasons for which the European Commission decided to present Small
Business Act were declared also insufficient results (performance) and hard conditions
of SME are also in the field of research and innovations. To strengthen innovation
activities is one of the main tasks of SME (Bessant & Tidd, 2009).
The Slovak government has declared support to innovations development in many
strategic documents. The strategic objectives of making innovation one of the main
instruments in developing the knowledge economy, ensuring high economic growth of
the Slovak Republic and catching up with the most advanced EU economies are
included in the Innovation strategy of the Slovak Republic for the years 2014 – 2020
and Innovation Policy of the Slovak Republic for the years 2014 – 2016, which cover
concrete actions leading to higher innovation activities of Slovak enterprises. The
actions were aimed at three most important priorities corresponding with the
principles, priorities, and measures given in SBA for Europe.
The first priority was oriented on the development of high-quality infrastructure and
an efficient system for innovation development. Besides others as one of the main
measures was indicated support to innovative industrial cluster organizations in
Slovakia. The purpose of this measure was to improve industrial competitiveness
through support to selected activities of industrial cluster organizations. Priority No 1
consisted of other measures such as “Innovation Action of the Year” and the measure
“Promotion of innovation and building of innovation awareness across the society”.
The aim of the measure “Promotion of innovation and building of innovation
awareness across the society” was to enhance the image of Slovakia in the innovation
area and to draft a comprehensive nation-wide promotion and communication model
with a view to raising the awareness of innovation across the society.
As the second priority was indicated “High-quality human resources”. Of special
importance were the measures oriented on “Innovation education for small and
792 Strategica 2016
medium enterprises”. The objective of these measures was to provide education and
training to firms and entrepreneurs in the area of innovation activities.
The third priority was oriented on “Development of efficient tools for innovation”. The
first measure in the priority was oriented on elaborating of national incentive projects
to enhance Slovakia´s innovation. The lack of funds combined with the lack of
innovation incentives are major problems in Slovakia. The special measure was
oriented on “Support of innovation activities in enterprises”. The purpose of this
measure was to increase the competitiveness of industry through supporting R&D
based innovation activities by businesses. The aim of the measure “Financial
engineering instruments – innovation funding support and support to increase public
spending on innovation” was to mobilize financial resources in the area of innovation
support.
The results of successful (or unsuccessful) implementation of above-mentioned
measures are expressed by main innovation indicators in SBA Fact Sheet. In Figure 2
are presented indicators given in the SBA Fact Sheet 2014 to evaluate the progress in
implementing the SBA – principle 8 (To promote the upgrading of skills in SME and all
forms of innovation). From Figure 2 is evident that the innovation performance of
Slovak SME relative to EU is below the average in many dimensions. A detailed analysis
is necessary to find out what are the main problems (barriers) to develop innovation
activity in SME´s sector.
Figure 2. Innovation indicators of the Slovak SME relative to the EU 27 average in the year
2014 (European Commission, 2015a)
It can be stated that from a long-term point of view the innovation activity of Slovak
SME is behind the EU average. Both main indicators “SME introducing product or
process innovations” and “SME introducing marketing/organizational innovations” are
for a long time below the average of EU member states. The indicator on “SME
introducing product or process innovations” reached in the year 2014 the value 58 %
of the EU average, the indicator “SME introducing marketing/organizational
innovations” reached 72 % of the EU average.
Succesful Management in Service Economy 793
Table 1. Innovating small and medium enterprises in Slovakia
(European Commission, 2015b)
2011 2012 2013 2014
Indicator
EU27 Sk EU27 Sk EU27 Sk EU28 Sk
SMEs introducing product
34.2 19.0 38.4 26.0 38.4 26 30.6 17.7
or process innovations
SMEs introducing
marketing/organizational 39.1 28.3 40.3 27.2 40.3 27.3 36.2 26.2
innovations
SMEs innovating in-house 30.3 14.9 31.8 21.8 31.8 21.8 28.7 15.0
Innovative SMEs
11.2 5.8 11.7 8.3 11.7 8.3 10.3 6.7
collaborating with others
It is evident that all indicators (SME introducing product or process innovations and
SME introducing marketing/organizational innovations) decreased during the last
3 years significantly. The situation is critical especially in indicator SME introducing
product or process innovations – it has decreased in the year 2014 according to the
year 2013 by 32 % (!).
The decline is evident also in the indicator SME innovating in-house (in the year 2014
it was 31 % less to the year 2013) as well as by the indicator Innovative SME
collaborating with others (decrease by 20 %).
Table 2. SME selling and purchasing online in Slovakia (Eurostat, 2015)
2011 2012 2013 2014
GEO/TIME
EU27 SK EU27 SK EU27 SK EU27 SK
% of enterprises selling 13 13 14 12 14 18 15 12
online
% of enterprises 19 15 16 14 18 20 22 9
purchasing online
What concerns the enterprises selling online, it is 12 % of all enterprises in the year
2014. The average of EU in the percentage of enterprises selling online is 15 %.
Positively is viewed also the increase in the percentage of enterprises purchasing
online. The high volatility in both indicators is the result of the changes in the statistics
of calculating the enterprises selling or purchasing online.
Aim and methodology of research
To overcome limits of the research based on evaluating the secondary data, we have
conducted from March 2015 until June 2015 the empirical research aimed at
evaluating innovation activities in small and medium enterprises in Slovakia. One part
of the research was oriented on identifying the main problems the Slovak SME
perceive as the barriers to their innovation activity.
The research was conducted by the questionnaires distributed via electronic mail. The
selective sample was created by 527 enterprises, 384 of them were small and 143
medium-sized enterprises. Representativeness of the sample was verified statistically
794 Strategica 2016
by means of non-parametric test – chi-square test. The test confirmed a representative
sample of selected set. From the overall number of enterprises, more than 40% of
enterprises worked in industrial branches (engineering, woodworking, electro
technology, chemistry, and rubber industries). A third of enterprises were active in the
sector of market services, 20% were from the building industry and 10% acted in
information-communication technologies.
For the question, if SME practice innovation activities, 174 enterprises responded
positively from the overall number of 527 enterprises (33.02 %), 112 of which were
small and 62 medium-sized enterprises. Together 353 enterprises (272 small and 81
medium-sized) stated that they do not practice any type of innovation activities, while
they try to act in the market without changes in entrepreneurial activity and they trust
to their entrepreneurial strategy.
Table 3. Division of Enterprises According to Size Structure and Realization of Innovations
Enterprise/Realization of Innovation Yes No
Small Enterprises 112 272
Medium-sized Enterprises 62 81
The main aim of a survey was finding out and analyzing the main problems the Slovak
SME perceive as the barriers to developing innovation activities in small and medium
enterprises in the Slovak Republic. This question was discussed not only by SME that
realize innovations, but also as well those enterprises without innovation activity.
Innovative enterprises can provide information on barriers; they really meet when
realizing innovation activities. On the other hand innovatively inactive enterprises will
provide the reasons for innovation activities they do not perform.
We divided the barriers of innovation activity in SME into three groups from the
viewpoint of their significance and influence on innovation activities of SME. The
division of barriers according to significance was carried out by means of a statistical
program of SPSS.
Results and discussion
As the main problems, the Slovak SME perceive as the barriers to developing
innovation activities were identified: lack of financial means for innovation, quality of
the innovative environment, lack of qualified employees and absence of cooperation
with other subjects in the field of innovation activities.
The main barrier within the group of barriers with a significant influence on
innovation activities is the lack of financial sources for innovation in an enterprise.
Financing of R&D activities in Slovakia is strongly below the average of the EU 27
countries. In the year 2014, the total expenditure on research and development
represented only 0.62 % of GDP (Statistical Office of the Slovak Republic, 2015). The
indicators on R&D expenditure in the business sector are only 29 % of the EU average
(European Commission, 2015b). Though, according to the SBA Fact Sheet for the year
2014 Slovakia achieved comparative strengths to the EU average in access to finance,
the majority of SME in Slovakia considers the problems with the accessibility of
financial sources for the most expressive factors limiting their innovation activities.
Enterprises introduced negative experience when they were acquiring means from the
Succesful Management in Service Economy 795
funds of the European Union, structural funds, or other public financial sources
(bureaucratic demand, administration, corruption, ineffective redistribution of means,
as well as ignorance of their drawing).The main external source of funding the
innovation activities remain the structural funds through the priority axes of the
Operational Programme Competitiveness and Economic Growth (Ministry of
Economy) and the Operational Programme Research and Development (Ministry of
Education).
The important barrier is the quality of the innovative environment and infrastructure
for innovations. More than 70 % of respondents are critical to the quality of the
innovative environment. Respondents expressed critical attitude to the existence and
activities of institutions supporting innovation activities as well as to the support of the
rise and development of innovative SME from the side of the state. Critical is viewed
that in Slovak regions the higher territorial units (VÚC) do not have innovation
structures; there is no scheme for effective management of the state innovation policy
and regional innovation strategies. An institutional framework for a more efficient
connection between industry, results of R&D and practice is missing. Slow
implementation, lack of coordination and consensus among the relevant ministries
appears to be critical. Respondents were critical to the long-term absence of creating
regional innovation centers, which should help to start the cooperation between SME
on the one side and universities, research centers, technological parks on the other
side, as well as to be helpful in the process of establishing the clusters.
Qualified human resources belong to one of the most important factors determining
innovation activity. Managers of SME identified the lack of qualified employees as one
of the significant barriers. In the Innovation Strategy of the Slovak Republic for the
years 2014 – 2020 was indicated as the second priority “High-quality human
resources”. A special measure in the above-mentioned strategy is oriented on
innovation education for SME. The objective is to provide education and training to
firms and entrepreneurs in the area of innovation activities. The reason for the
adoption of this measure is a low level of innovation activities and creativity of
businesses with SME falling in the category of low innovative enterprises (this is also
about the motivation of employees to develop innovation activities).
According to results of our research the absence of cooperation with other subjects in
the field of innovation activities could be included into the group of averagely
significant barriers. Slovak enterprises are dependent on innovation cooperation.
When we look into the indicator of innovative SME collaborating with others the value
of this indicator was in the year 2014 only 65 % of the average of EU member states.
As barriers to cooperation within the SME, subjects is in many cases lack interest, low
motivation, insufficient financial sources and communication problems. The necessity
to develop innovation activity calls for the cooperation in this area. The cooperation of
SME with other subjects in the field of innovation activities brings several synergic
effects to the enterprise (Kressel & Lento, 2012). The most important of them is
common sharing of knowledge and simpler approach to the latest expertise, common
sharing of capacities, lower demands for financial sources, etc.
Thought The Innovation Strategy of the SR and other initiatives and policies consider
clusters to be an important tool for sustainable development and for increasing of
competitiveness of regions and of the innovation potential of SME, the SR doesn´t have
796 Strategica 2016
a functioning support mechanism for the creation and development of clusters. There
is not a law regulating the setting up and operation of clusters. However, there was a
spontaneous formation of different types of technological clusters with the goal to
develop different industries.
Measures to support the innovation activities in SMEs in Slovakia
With the aim to improve the innovation performance of SME, it will be necessary to
implement in the field of innovation these main measures.
For the future, it will be necessary to mobilize all financial sources in the area of
innovation support in order to ensure that innovation activities performed by SME in
Slovakia receive the same level of funding as those in advanced EU countries. In
connection with efforts towards the most effective use of allocated financial resources,
an indirect state aid has to be provided to profit-generating projects implemented by
SME, i.e. financial engineering instruments such as guarantee funds, credit funds,
venture capital funds and municipal development funds. There is an enormous interest
of responsible institutions in coordination with the Ministry of Finance of the SR to
apply the upgraded model of usage of innovative financial tools in order to support
innovation activities in SME. To support the financing of innovations the situation
could be changed not only by one-way financial support from the state budget, but we
see the solution also in overall improvement of the business environment (for example
through a reduction of indirect taxes – especially VAT rate and reduction of
contribution to social and health insurance companies).
It is necessary to create an innovative environment in the SR that eliminates
weaknesses in the area of research and innovation (R&I) and develops opportunities
that create conditions for fundamental enhancement of the innovative environment. Of
special importance is the development of institutions supporting innovation activities
on the national and regional level. A critical element is above all the autonomous
functioning of sectors of education, R&I and business practice, which results in
different understanding of R&I. Of special importance is the creation of linkages
between multinational corporation´s R&I and domestic businesses R&I framework
(including the SME) and increasing the interest of businesses and industrial clusters in
the rebuilding of industrial R&I structures (entities). Successful implementation of
innovation strategy requires a structural change of current competencies in the
management of research and innovation in the SR and a principle manoeuver in
cultural change of innovative environment (Lesáková, 2013). According to the research
results government should pay much more attention to the elimination of
administrative barriers and create a systematic institutional support to SME on the
national and regional level.
As important presumption to develop innovation activity was indicated the high-
quality human resources. Quality management, as well as employees able to think
creatively and to implement innovations in their activities, represents one of the most
important presumptions of the development of innovation activity of an enterprise.
Management must be able to lead and direct the thoughts and ideas in the enterprise,
to search and use talents, be aware of the fact that the enterprise will be successful due
to being distinguished by the human resources (Frappaolo, 2006). From the viewpoint
Succesful Management in Service Economy 797
of employees pro-active approach is expected, as well as the ability to learn and
implement knowledge in the innovation activity. Remuneration of employees for their
innovation ideas is a significant motivator and presumption for the increased effort of
employees when searching for new, innovative solutions (Lesáková, 2009).
Building partnership is a way to be involved in innovation activities. In the Innovation
strategy of the SR for the years 2014-2020 was indicated as one of the main measures
the support to innovative industrial cluster organizations. The purpose is to improve
competitiveness through support to selected activities of industrial cluster
organizations with a view to promoting joint industrial activities in selected areas
(Innovation Strategy of the Slovak Republic for the years 2014 – 2020). The measure
could help in supporting selected cluster activities, which contribute to increasing the
competitiveness of the innovative cluster organization’s member companies. It will
focus on actual well-established cluster organizations that have been carrying out
activities for the benefit of their members in the past. The measure will thus indirectly
stimulate the development of SME, which are the ones most vulnerable in the long-
term – also due to their lack of innovation capabilities, as well as to stimulate the
establishment of new cluster organizations, thus stimulating cooperation in diverse
industries or regions.
Of special importance is the measure oriented on the support of innovation activities in
enterprises. The purpose of this measure is to increase the competitiveness of industry
through supporting R&D based innovation activities by businesses, by supporting the
introduction of new innovation technologies (not their purchase), procedures, or
products. There are two essential tasks to be solved in favor of a successful measure.
Primarily, the Ministry of Economy of the SR has to draw up the rules of support in
close cooperation with regional authorities. In addition, another relevant task is the
publication of a call for the submission of support applications.
One of the important measures is the promotion of innovation and building of
innovation awareness across the society. The aim of this measure is to draft a
comprehensive nation-wide promotion and communication model with a view to
raising the awareness of innovation across the society. The measure would serve to
map all relevant activities implemented by the state and public administration in the
field of innovation and to identify new activities with the potential of complementing
measures that are already active. The resulting communication model would thus
unite already implemented activities and propose new ones, in order to develop an
optimum model with synergic informing effect.
Conclusion
In today´s entrepreneurial practice innovations must be a natural part of any
entrepreneurship. As Cameron and Green (2006) stress permanent and regular
innovation is becoming a competitive necessity; to be successful in the future requires
interrupting conventions.
The lack of funds combined with the lack of innovation incentives are the major
problems in Slovakia. The lack of incentives to encourage innovation and transfer of
R&D resulting in practice is clearly visible both in the academic and business sectors.
798 Strategica 2016
For as long as innovation and research do not become a regular line of business or its
inherent part, and if the business is not closely associated with innovation, the existing
situation in this field cannot improve in Slovakia.
In order to improve the conditions for the long-term development of SME in the area of
innovation Slovakia has to put in place a quality innovative infrastructure, an efficient
system for R&D and human resources development, as well as efficient tools for
innovation.
In line with the country-specific recommendations of the European Council it is
necessary to improve the cooperation between the business sector, research
community and educational institutions to help develop a well-functioning “knowledge
triangle” and increase the performance of the R&I system, as well as to stimulate
private investment in R&I in order to enhance the innovation capacity of the Slovak
economy. It is necessary to support high-quality R&I because it is a necessary
precondition for technologically advanced innovations. It is also necessary to continue
building up a quality R&I infrastructure, train a develop human resources, create an
attractive and stimulating environment for the tertiary level of education and
subsequent placement of young researchers in R&I entities.
The main implications of the research are directed not only to the innovation´s policy
makers and to the authorities, which are in charge for implementation of Small
Business Act initiative in Slovakia, but also to the research and academic institutions,
as well as to the small and medium enterprises in the SR.
For any improvement in the given areas of SME, a complex approach is required, as is
inter-authority cooperation and mainly the active cooperation of entrepreneurs
themselves. This complex approach to solving the problems of SME would restart their
development and create a competitive advantage for our businesses.
Acknowledgments: The paper was elaborated as a part of VEGA
project 1/0494/15 “The research of factors influencing the
successfulness of innovative small and medium enterprises in the
Slovak Republic”.
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Business Ethics and CSR
Business Ethics and CSR 801
BOOSTING SUSTAINABILITY FROM BEYOND:
MICRO-POLITICS AND THE ROLE OF REGIONAL HEADQUARTERS
Andreas G.M. NACHBAGAUER
University of Applied Sciences BFI Vienna
22 Wohlmutstraße, 1020 Wien, Austria
andreas.nachbagauer@fh-vie.ac.at
Abstract. “Isolated hierarchy” companies, often to be found in the Asia-Pacific region,
tend to exert direct, personal and strong control over all company units; furthermore,
southern multinationals are often strongly influenced by their governments. These
companies have different traditions of ethics, respect for society and the environment
than European ones. Sustainability as a strategic concept usually is initiated by corporate
headquarters – but given the restrictions of isolated hierarchies in emerging markets, one
would not expect that to happen with southern multinationals. Recently regional
headquarters (RHQ) have gained attention. Being responsible for a number of branches,
RHQs can to a certain extent shape the strategic focus of the entire company. The
objective of this conceptual paper is to examine if there are possibilities to boost
sustainability “from beyond”, initiated by RHQs. Following suggestions by Hansen and
Küpper (2009) and Bouquet and Birkinshaw (2008), we interpret managing as power
games. We will examine three levels to promote sustainability despite lacking corporate
headquarter (CHQ) support. First, we interpret strategizing as an innovation game. At
this level, the odds of influencing the CHQ are low. RHQs will step in increasingly
prominently when implementing strategies – we will coin this project games. At this level,
the focus shifts from managerial strategies to micro-political tactics. Regional
headquarters draw their power from performing managerial functions either by
integrator or negotiator power or particularly through broker power. A third way to
boost sustainability is by declaring them mere adaptation to local needs. This is in line
with observations that sustainability could ultimately be implemented as “pure
operation” below the CHQ’s threshold of strategic perception. Tactics that fit best to
isolated hierarchies and accept the strategic prerogative have the greatest potential to
influence implementing sustainability from below. On a more theoretical level, these
considerations provoke ethical issues.
Keywords: multinational companies; regional headquarters; sustainability; micro-
politics; managerial power games.
Introduction
Recent concepts of sustainability, grounded on an integrated view of the triple-bottom-
line encompassing economic, social and ecological aspects (Elkington, 2004; Kleine &
Hauff, 2009; Steurer, Langer, Konrad & Martinuzzi, 2005), emphasize the global
responsibility of companies, especially internationally operating and multinational
ones (Fernando, 2012; Steurer, 2001). Research and practice claim a strong burden of
proof (Loew, Ankele, Braun & Clausen, 2004; Spitzer & Martinuzzi, 2013) and the need
to incorporate sustainability into the corporate strategy (Gazzola & Colombo, 2015;
802 Strategica 2016
Mirvis & Googins, 2006; Rangan, Chase & Karim, 2012), mostly by demonstrating the
business case for sustainability (Arevalo, Castelló, Colle, Lenssen, Neumann & Zollo,
2011; Carroll & Shabana, 2010; Galbreath, 2009).
A second tradition harks back to company and management ethics, emphasizing the
ethical and moral obligations of companies (Göbel, 2013; Karmasin & Litschka, 2008).
The ethical goal of a fairer world was significantly influenced by development
cooperation, inter alia in the framework of the United Nations (Leiserowitz, Kates &
Parris, 2005, 2006). Based on global accountability and solidarity, this view includes
both responsibilities for subsidiaries, operating sites, and companies within the group
as well as responsibilities for site countries and stakeholder groups – albeit motivation
from the argument that “good ethics is good business” has recently evoked
fundamental criticism (Painter-Morland & ten Bos, 2016).
At any rate, in highly developed economies sustainability and sustainable management
undoubtedly take on the greater significance on both the practical as well as the
theoretical agenda. However, this is not equally true for multinational companies from
developing or emerging countries, especially those of Asian extraction – though we
should not overgeneralize this in the light of sustainability pioneers (i.e., Thailand:
Ferguson, 2011; Sri Lanka: Hunter & Van Wassenhove, 2011; India: Pereira, Munjal &
Nandakumar, 2016; DR Congo: Mària & Devust, 2011). Sustainability as a strategic
concept usually is initiated by CHQs (e.g. Grayson, 2011; Ragusa, 2011) - but given the
restrictions of isolated authorities and emerging markets you would not expect that to
happen in southern multinational companies (SMNC). To foster sustainability there,
we have to search for alternatives. Another possibility at hand is the initiation of
sustainable corporate behavior by RHQs in high-standard locations.
The objective of this paper is to examine if there are possibilities to boost sustainability
“from beyond” concentrating on SMNCs from East Asia. After setting the scene in the
first part, the main body of the paper is devoted to the question: which contributions to
the implementation of sustainability can be provided by RHQs? We interpret strategy
as strategizing (strategy as practice), devoting our attention to micro-political actions
and power games. In detail, we will examine three types of managerial power games in
different areas: strategizing as innovation game, as project game, and as a routine
game.
Setting the scene
Until recently, globalization was considered one-directional from developed to
developing or emerging countries. This presented the opportunity to transfer
sustainability standards from high-level to low-level countries – if insight, pressure,
and regulations were strong enough to commit “northern” MNCs to their global
responsibility. However, the business world has changed: the recent influx of MNCs
from the “Global South” into Europe has gained ground (Hanemann & Huotari, 2015;
UNCTAD, 2015). Recent years have been marked by a dramatic rise in foreign direct
investment especially from China and Hong Kong, now second and third in worldwide
rankings. Developing Asia has overtaken North America and Europe as a region with
the largest FDI outflows (Figure 1), with China as the most prominent investor in
Europe.
Business Ethics and CSR 803
Figure 1. FDI outflows by group of economies and region 2012-2014 (billion $)
(UNCTAD, 2015, p.7)
These companies – and countries – have different traditions of ethics, respect for
society and the environment than northern ones – if they have standards of
sustainability at all (Mirza, Giroud & Wee, 2011). A look at the situation in their home
countries, especially China, suggests that they are in a state of pure Manchester
capitalism regarding environmental issues (e.g. EIRIS, Sustainable Society Index).
Other countries lack human rights by western standards (Human Rights Risk Index;
Freedom in the World). Milton Friedman (1970) and the Communist Party of China
seem to share the opinion, that, “the social responsibility of business is to increase its
profits” (Bowie, 2012; though this connection is disputed, e.g.: Nasser Appel, 2014).
The business system approach (Whitley, 2007), emphases the MNC’s integration into
regional economic and business contexts. Whitley (2012) distinguishes three patterns
of authority distribution: isolated, managerially coordinated, and cooperative
hierarchies. Isolated hierarchies prevail in the Asia Pacific region. Here, power is highly
concentrated, with top management taking all-important strategic and operational
decisions and coordinating activities centrally. Top managers hesitate to delegate
control, and if they do, decisions are transferred to family-related managers only.
Control of subsidiaries is often supported by posting managers directly from the CHQ.
The isolated hierarchy type of company is accompanied by a distinct
internationalization and control pattern: with the tendency to exert direct, personal,
strong control over all the company parts, the self-efficacy possibilities of individual
branches are limited.
Accordingly, various authors claimed fundamental differences in the way business
ethics are practiced. In their influential textbook, Crane and Matten (2015) summarize
the discussion on business ethics with regard to the three key regions: Within East
Asian companies, responsibility for ethical issues is left to the top management,
government (that is especially true for China, see Nasser Appel, 2014) and
corporations are main actors. Key issues are corporate governance and accountability
at the managerial discretion, referred to as the “benign managerial model” by
Parkinson (2003). This is a sharp contrast to the individualistic approach in North
America or the European tradition of participation and social balance.
Despite large differences between Asian societies, most of these features definitely
apply for China. There, SMNCs are often strongly influenced by their governments
through both direct and indirect funding and control (Lu, Liu, Wright & Filatotchev,
804 Strategica 2016
2014), thus also exhibiting specific ownership structures. Social rights are
implemented only selectively, and a clear distinction between formal and informal
working relationships is regularly applied (Mirza et al., 2011; Nölke, 2013).
With increasing international integration, MNCs are facing the challenge of
reconsidering their strategies and business processes by adapting to regional
conditions while at the same time seeking synergy advantages. Furthermore, when
organizations face a bunch of different and conflicting demands, arising both from
operating single systems across different business and because of the legitimate
demands of outside stakeholders on their practices, their situation will lead to
tensions. MNCs are thus in need of a set-up in which organizing and strategizing are
mutually reinforcing, creating organizing practices that are tailored to the demands of
different strategic goals and strategizing practices that recognize the interests and
identities of different organizational groups (Jarzabkowski & Fenton, 2006).
One possible solution available to large international companies is the establishment
of RHQs, which occupy a middle position between CHQ and operating companies in a
pyramid of ownership (Enright, 2005; Lehrer & Asakawa, 1999). By employing RHQs,
MNCs try to address not only market and production needs but cultural and ethical
differences on a regional level (Godiwalla & Damanpour, 2006). Practitioners and
scientists developed various models to approach with these differences (e.g. Carrol,
1991; Donaldson & Dunfee, 1999; Enderle, 1995; Galbreath, 2006). Common to all
these strategic considerations is both the call for a balance of home and host country
ethics and the alignment of ethics to strategy and organizational structure.
This could open opportunities for the implementation of sustainable thinking in the
European RHQs of SMNCs. Responsible for a number of branches – some located in
high standard, others in medium-standard countries – RHQs can to a certain extent
shape the strategic focus (Nachbagauer, 2016). Some might even hope that RHQs offer
an effective transmission mechanism for advanced models of sustainability from high-
standard countries to companies in regions with lower standards and less public
pressure.
(Not) playing the game
In 2013, Zollo, Cennamo, and Neumann (2013) ascertained that there is abundant
research on the “what” and “why” of sustainability in corporations, but significant
knowledge on practices of more sustainable models in companies is missing. This is in
line with the turn to strategy as strategizing and looking at micro-political actions.
Following a suggestion by Hansen and Küpper (2009), we interpret strategizing as
(power) games. Ortmann, Windeler, Becker and Schulz (1990) have identified three
types of power games in different arenas of organizations: innovation games at the top
level, project games at the middle level and routine games at the operational basis. We
will identify the top, middle and operational levels with CHQ, RHQ, and branch,
respectively.
Business Ethics and CSR 805
Strategizing as innovation game: legitimacy, resources, and centrality
When turning to strategy as action and to micro-politics (Jarzabkowski, 2004; Pye &
Pettigrew, 2006) the focus shifts from formal, written strategy papers drafted by top
management to factual actions. In an MNC, the management of the central unit is
responsible for a constant strategy renewal process – innovation games are thus meta-
games that redefine new power positions and profit opportunities for other actors and
units. Strategizing, then, is not mainly analyzing, calculating and deciding rationally,
but is open to a battlefield of conflicting interests in “strategic warfare” characterized
by dynamics and risk-taking, providing opportunities for lower positions in companies.
In their significant literature synopsis, Bouquet and Birkinshaw (2008) have provided
a conceptual overview of the power and influence of weaker parties in MNCs. They
distinguish between three strategic objectives, i.e. achieving legitimacy, controlling
resources and gaining centrality. Employing these objectives, even low-power units
will gain influence on the CHQSs’ decisions.
RHQs can try to achieve legitimacy especially by presenting a good record of
accomplishment to CHQs and accepting the priority of top management decisions
while at the same time not losing the acceptance of its subsidiaries and the respective
regional stakeholders. This underpins the ambiguity of expectations an intermediate
unit is confronted with. Smart managers will turn this uncertainty into a strategic
resource: for instance, they can demonstrate the CHQ that following sustainability
programs or CSR practices will pay off in a certain region. To this end, they will be in
need of watertight business cases. Alternatively, more primitively, they will argue with
the license to operate, to be embedded and legitimized, for which they require
conformity with institutional factors and national business systems. Other regional
managers may emphasize their role as spokesperson and representative of their
subunits’ interests, exploiting the dual legitimacy objectives against each other.
Critical resources are the main issue in power relationships. In global and mature
economies sourcing and markets have become more and more diverse, quickly
outdating access to raw material, cheap labor or (large) customer markets. Today,
subsidiaries use more sophisticated critical resources as an advantage, for example
providing strategic (local) information and knowledge, coming up with innovative
ideas and practice, providing specific technologies, expertise, and talent to
headquarters, other regional units and subsidiaries. Adopting CSR or following
sustainability claims could open up new relations, especially to young and highly
educated urban milieus. RHQs possessing or having access to these critical issues will
definitely gain power – if they manage to “sell” these complex and tacit sets of services
to the company’s other parts.
The conception of RHQs places them in a middle position between CHQs and operating
subsidiaries. Consequently, Bouquet and Birkinshaw (2008) estimate the centrality
and thus influence of RHQs to be high. Centrality is always disputed, however. But
power stemming from the position in the communication network is disrupted if the
mother company offers a wide range of opportunities to meet and interact with central
persons directly, i.e. by nominating representatives from branch level to central
committees, allowing for annual strategic forums with the possibility of publicizing
their achievements, pushing initiatives, and soliciting resources. Especially detrimental
are power powerful corporate expats executing formal direct control (Harzing, 2011).
806 Strategica 2016
To sum up, we can see a certain especially indirect influence of regional units on
headquarters’ decisions, but relevance for the overall sustainability strategy will be
limited. Hansen and Küpper (2009) emphasize that strategic initiatives need not come
from top management but as they can be blocked by top management they need if not
support then at least acquiescence from headquarters. Directly influencing the CHQ
and challenging the status quo might be successful in managerially coordinated and
cooperative hierarchies, but there are considerable doubts regarding the feasibility of
this approach in isolated hierarchies. We thus enter micro-political tactics.
Strategizing as project game: micro-political tactics
Whereas the design of organizational adaptation processes remains the primary
responsibility of the corporate office the introduction and enforcement of
sustainability aspects in organizations is commonly left to regional units. At the
implementation stage, the focus shifts from innovation games to project games, i.e.
from managerial power strategies to micro-political tactics. Project games mainly are
transmission games from top to operations and back again (Hansen & Küpper, 2009) –
and this is exactly where RHQs are positioned in the structure of MNCs. According to
Küpper and Felsch (2000) managerial power in organizations evolves between two
poles of power relationships: cooperation versus competition. They define three types
of management power in organizations: integrator, broker, and negotiator.
Integrator power arises at the intersection of cooperative power relationships and
aims at uniting the interests of different units, thus initiating coalitions across
departments and subsidiaries. Typical micro-political actions facilitate the group
formation process, represent group interests to the outside and try to convince
potential group members. Cooperation profits are based on stability but integrator
power is endangered by extensive institutionalization. Thus tactics will favor a
medium level of routinization, allowing for exploiting a certain degree of uncertainty.
SMNCs in Europe work in a setting that is characterized by cohesive and cooperative
employment relations while at the same time being dependent on close links to local
networks. Employees and units tend to have high skills and high hopes of involvement
and consultation at the workplace (Morgan & Kristensen, 2009). They will be more
likely to resist transfers of practices, policies and processes coming from headquarters
– especially in the form of information shaping and collective resistance through
coalition building comprising both internal stakeholders, such as RHQs and subunits,
as well as external ones, such as suppliers and customers, legal entities and education
institutions (Bouquet & Birkinshaw, 2008). These coalitions are in need of an identity-
generating program, internally to underpin cohesion, externally to be presented to the
CHQ as an alternative to prescribed frameworks. It is not unreasonable to expect that
especially sustainability programs – nowadays widely accepted throughout Europe’s
political and business elites – or ethical practices embedded in the inner or near
environment of branches and close to stakeholders, but far enough away from CHQs
core believes could meet this need.
The power of brokers evolves at the intersection of competitive power relationships
(Hansen & Küpper, 2009). The broker function is based on the ability to bring
diverging interests together and to draw up positive exchange relationships between
organizational units or between the organization and its environment. Typically, RHQs
Business Ethics and CSR 807
are in the best position to establish broker power as they are positioned at particular
points of intersection and coordination. In principle, brokers facilitate a partial
exchange of resources and promote the interests of all units involved in the partial
reduction of the alternately generated uncertainty.
Belief in the neutrality of the broker is vital; thus the slightest indication of having been
captured by one party is detrimental – brokers are always under suspicion of colluding
with powerful units. Brokers wanting to secure their specific power in this situation,
therefore, tend to support the weaker party while at the same time trying to convince
the stronger party to be endangered. However, support for the weaker party has its
limits, as it is equally important not to lose the CHQ’s acceptance. In fact, exerting
broker power is to scintillate in the art of the prancing counselor of ambiguity. We
have presented some tactical advice for smart managers in this situation when
discussing legitimacy.
A frequently used means to impress allies and frighten dissenters is to raise potential
threads of resistance or block behavior against cutbacks and exploitation interests –
and as a side effect promoting a more long-term and caring attitude. Hence RHQs,
eager to maintain their broker power, will support sustainability movements and
ethical claims stemming from a high-level environment against the suppressing
interests of the CHQ from a low-level environment.
Negotiator power couples the integrator and broker functions with partial collusion
from the leader of an opponent unit. Therefore, it can originate from outside
appreciation. Thus, if RHQs successfully manage to collude with either legal authorities
or competitors’ units in setting up an advanced and renowned sustainability program
and at the same time show their devotion to headquarter standards and do not
challenge overall strategy, they will gain negotiator power. Additionally, we can count
on the resulting lock-in effect if initial actions go unchallenged: this effect makes a
reversal of the once-landscaped path towards sustainability financially, culturally and
psychologically more expensive. The "compulsion of the factual" (Fritz Morstein Marx)
favors the (micro-) political position of autonomous offices and RHQs compared to
their CHQs. Thus, a variety of small steps at the regional level can ultimately lead to a
sustainable concept of sustainability.
Most regional headquarters of southern multinational companies are embedded into
isolated hierarchies - we would, therefore, expect the enforcement power to be low.
Nevertheless, regional headquarters are not without influence either. Regional
headquarters will step in when it comes to the strategies’ implementation in the form
of projects. They draw their power from performing managerial functions, either by
integrator or negotiator power and particularly stemming from broker power. All
three kinds of power sources are heavily endangered by corporate expats in RHQs.
Formal direct control can be traced and circumvent, thus especially expats exerting
more subtle and informal control mechanisms are the true obstacles (Harzing, 2001).
Strategizing as routine game: disguising as adaptation only
Ambos and Schlegelmilch (2010) show that RHQs have much autonomy in decisions
regarding regional production, such as changing the production process or building
new production capacity, developing an existing product or product line, and
808 Strategica 2016
determining production outsourcing to subcontractors. This is where routine power
games flourish (Hansen & Küpper, 2009): centered on day-to-day strategizing, they are
oriented towards operational sub-goals.
Pursuing profit as ultimate goal of any enterprise, the differentiation between strategy
at headquarters and operation in the branch is – at least partially – a way to deal well
with the tension field of integration and adaptation. Especially in the area of
sustainability, companies are regularly forced to accept this differentiation because
national or regional norms, standards, and expectations are much more diverse than
for example customer requirements and product safety standards. Furthermore,
standards and regulations are generally not defined as strategic requirements but as a
concrete demand for production, process or product.
Adaptation needs come naturally at early stages of dealing with sustainability
expectations. All models of integrating sustainability into strategy start with (reactions
to) problems and outside pressure. Most companies starting a business in high-
standard environments will feel the need to face this issue – at least on the operational
level. This opens up an opportunity to implement sustainability as “pure operation”
below CHQ’s threshold of strategic perception. By using operations, and here especially
knowledge management, RHQs are able to influence strategy indirectly – and thus to
be particularly effective.
This move can be supported by sustainability legislation exerting constant gradual
pressure. Slight modifications are more successful than large and sudden changes.
With revolutionary changes, actions aimed at dodging sustainability requirements,
such as relocations, can be more easily justified and enforced in-house. By contrast, the
argument that one is merely complying with outside pressure to adapt to regional
requirements and the possibility to justify this in the organization as purely
operational or administrative adjustment without any strategic claim vastly increase
the regional scope for decision-making.
Morgan and Kristensen (2006) describe the metaphor of boy scouts subsidiaries that
follow the CHQ’s demands and do not go beyond their mandate. In the same vein,
Bouquet and Birkinshaw (2008) label behavior that consists of yielding to the
opinions, judgments and demands of CHQ as deference. While we will certainly find
many RHQs and subsidiary managers exactly matching this description, especially in
isolated hierarchies, we will also come across more proactive managers pursuing
sustainability. To be clear on this, there is nothing wrong with being a Boy Scout
manager: this could pay off personally, in terms of both career and recognition, as well
as organizationally in terms of budget and centrality.
Delany (1998) illustrates the opposite behavior of boy scouts as subversive strategies.
I will not follow this notion, as questioning the company’s strategic goals, in general,
has a negative touch. Normally managers do not merely exploit company resources,
and without a doubt, most managers will believe in good faith that they are acting in
the company’s best interest – even if they oppose top management orders. What we
can learn from the labor process debate (Burawoy, 1979) and eminent sociologists
such as Crozier and Friedberg (1979) is that organizations are dependent on a
permanent dialectic of control and consensus. Micropolitics in organizations can be
Business Ethics and CSR 809
inter alia understood as a mutually fruitful arrangement to respect each other’s
fiefdom while at the same time pursuing one’s own goals.
Brunsson (1989) goes one-step further and distinguishes between action – what really
happens in the respective organizational production – and talk. The latter is concerned
with responding to the inconsistent requirements of the environments and the
organization’s desire to maintain its legitimacy in the face of these requirements. We
have previously given some hints as to achieving legitimacy and discussed the double
bind in the RHQ’s intermediate situation full of ambiguity. As subsidiaries are foremost
controlled by a framework of benchmarks and capital transfers (Morgan & Kristensen,
2006) I want to stress again the need to present a credible record and plausible figures
in line with the strategic provisions and operational targets, to enable the subaltern
parts to pursue their own sustainability activism behind this veil.
To live up to these double standards, it is helpful to understand the CHQ’s provisions in
detail, to discern one’s own room for maneuver and at the same time to get an idea of
the CHQ’s language, so that the barely sayable can be said. Bouquet and Birkinshaw
(2008) provide us with three means to pursue these ends: co-optation is the tactic to
bring influential outsiders into one’s network; representation works the other way
round, i.e. by having an advocate at the top management committees, either directly or
– sometimes even more effective and reliable – via third parties. Both tactics bear the
hope that these elites will provide the unit with useful informal information, expertise,
and access to networks. The main road to truly understanding which areas are of
importance and reducing uncertainty definitely is feedback seeking, either by
monitoring headquarters utterances for helpful clues or by direct inquiry at the CHQ.
All tactics mentioned above share one major problem: in isolated hierarchies and
especially in SMNCs we have to factor in the presence of expatriates. If nothing else,
these managers are missioned to closely control and direct the subunit (Harzing,
2001). Some RHQs will try to collaborate and buy in these expats, even to proselytize
them into sustainability. However, the odds of being successful are conceivably low
given the expats’ short-term assignments, career interests, personal network bindings
and, not least, their mandates. Loyalties are with the home country, and “going native”
is highly unlikely.
Nevertheless, boy scouts are sometimes more than humble and helpful folk. At a closer
look, they may reveal a darker side of concealment and plots. Clever and witty, they
will find more sophisticated ways to play tricks on the CHQ. Moves fitting isolated
hierarchies best by accepting the strategic prerogative of the headquarters and
exploiting uncertainty zones will have the greatest potential to promote sustainability
from below. Appropriate tactics to mitigate close control might include but are not
confined to (Neuberger, 1995):
- rationality: supplying information on exact plans, demonstrating own expertise;
- referring to approved and accepted standard procedures;
- use of projects: declaring projects as research or trial, step-by-step approach, starting
small projects that get larger by and by;
- disguising: sailing under foreign flag; covering through approved programs or
management decisions;
- white knights: participating in resistance, retreat and appearing as saviors in distress.
810 Strategica 2016
Further tactics include blaming others, externals or head offices, for failures and
appropriating successes – knowing that heroes and scapegoats are primarily
determined by senior managers who ultimately have the power to reconstruct
numbers and interpret their meaning.
Routinely, subordinates’ micro-political actions are seen as treason to company values,
as questioning the authority of CHQ, or just as a spanner in the works of an otherwise
perfectly functioning machine. However, it becomes increasingly apparent that
searching for micro-political activities in RHQs might also provide CHQs with new
insights. As Morgan and Kristensen (2011, p.1485) put it: “Conformity provides no
long-term basis for survival and growth. […] The head office cannot in the long term
have both hierarchical control and performance.”
Conclusion and ethical implications
We started by stating that we would not expect sustainability to be at the forefront of
the strategic interests of SMNCs now sweeping into Europe. Alternatives would be
needed to foster sustainability, and our search led us to RHQs, which have gained
attention recently. We have interpreted managing as power games and examined three
ways to promote sustainability despite lacking CHQ support.
First, we interpreted strategizing as an innovation game. Despite the odds of
influencing the CHQ’s strategy still being low, there are some opportunities for low-
power actors when targeting the objectives “achieving legitimacy”, “controlling
resources” and “gaining centrality”. RHQs will increasingly step-in during the
implementation phase of strategies – we coined this project games. RHQs draw their
power from performing managerial functions, either through integrator or negotiator
power, or – particularly –broker power. Actors with sustainability interests inside the
RHQ as well as the business environment exerting pressure play an important role
then.
A third way to boost sustainability is by declaring it a mere adaptation to local needs.
This is in line with observations that sustainability could ultimately be implemented as
“pure operation” below CHQ’s threshold of the strategic perception. We employed
Brunsson’s (1989) differentiation between talk and action to search for tactics and
extended these ideas to sophisticated ways of playing tricks on the CHQ – mind you, all
in the best interest of promoting sustainability.
Looking at strategizing (strategy as practice), we proved that the micro-political
framework provides a helpful heuristics to find fresh ways out of the dilemma
situation RHQs are trapped in when pursuing sustainability issues. On a more
theoretical level, our considerations provoke ethical issues.
At the individual level, the question of motivation remains unanswered: Why should
RHQ’s managers be interested in pursuing sustainability beyond anything that “pays
off”? Quoting Friedman (1970, p.126), a corporate executive’s “responsibility is to
conduct the business in accordance with their [owners] desires, which generally will
be to make as much money as possible while conforming to the basic rules of the
society, both those embodied in law and those embodied in ethical custom.” Presenting
Business Ethics and CSR 811
conformity pays off for managers in terms of career and recognition, and for the RHQ
in terms of budget and centrality. Why then challenge CHQs standards and strategies?
After all, if managers pursuing ethical goals and sustainability claims by maybe not so
ethically sound practices get sacked, nothing is won for the case of ethics and
sustainability. These questions clearly refer to the discussion of Corporate Citizenship.
How to assess following double standards? Is Brunson’s “hypocrisy” ethically sound?
In other words, is the means “micro-political actions” justified by the end “high local
ethical responsibility”? All considerations on both individual and organizational (i.e.
RHQs) level are deeply rooted in the instrumental paradigm of ethics, but, though rare,
I do not neglect ethical acts of conviction in organizations. Alas, in a modern,
rationalized society (Max Weber), interest-oriented, instrumental behavior in and of
organizations proved to be more stable, predictable and widespread than pure
altruistic or philanthropic actions based on undisputed universal norms.
Identities and actions as social discursive constructions are dialogical and situational,
especially when confronted with diverse work situations (Wright, Nyberg & Grant,
2012). Managers are more flexible regarding their action and believe than the classical
role theory or comparative cultural studies claim. Especially managers in hierarchical
business situations have to adapt to constraints. Furthermore, narrative and action
coherence is simply not important for most managers in their day-to-day business
(Allen, Marshall & Easterby-Smith, 2015). Thus, being flexible is not flip-flopping, but
smart use of situational factors, At best drawing on ethical issues, are conceived as
valuable political resource – and managers are invited to be more daring.
On a societal level, we could question the global validity of ethical norms. In fact,
sustainability and CSR are concepts based on northern and western ethical
considerations and experiences, and the embeddedness of concepts and practices into
the European American national cultures and national institutional arrangements is
gaining importance (Fransen, 2013). Looking more closely at the behavior of
"northern" companies in the "global south", results are disappointing, or at best mixed.
NMNCs often do not only take advantage of economic issues of southern countries, but
increase their problems, and they are esteemed no better than SMNCs (Khan, Munir &
Willmott, 2007; Mària & Devuyst, 2016; Wiig & Kolstad, 2010).
Thus bluntly pressing for sustainability, CSR and ethical practices beyond a small
common global standard is likely to be understood as “westernization” or “new
imperialism”. Just China, a large state-organized business system becoming more and
more assertive, will emphasize its own tradition of ethical standards, while still failing
to adopt the social and ecological pillar of sustainability by western interpretation
(Bowie, 2012). Others – mostly oil-producing countries like Saudi Arabia – seem to
have an ethical wild card, while western companies and states ignore the fact that they
are a major violator of human rights and are quite unapologetic about it. Without a
doubt, recent tendencies of re-traditionalisation in the Islamic World – a market of
1.6bn – will undermine attempts for a common understanding of ethical standards.
I do not hesitate to admit that this paper is full of limitations. One could argue against
the theoretical grounding in micro-political organization theory, others will object to
the selection of literature and concepts. Some arguments may be too straightforward
and zebra thinking. SMNCs are definitely depicted only in broad-brush manner,
812 Strategica 2016
without touching the vast diversity of real-life business. In addition, I just touched the
vast discussion of ethics in business. Admitting to all these challenges, I nevertheless
maintain the central claims. One limitation has to be added, and I do think this is the
most significant one: the empirical proof is missing. This criticism is an invitation to
interested researchers including myself.
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Business Ethics and CSR 815
ETHICAL DIMENSION OF CSR IN THE ROMANIAN BANKING SECTOR
Georgiana-Loredana FRECEA
Bucharest University of Economic Studies
6 Romana Square, Sector 1, 010374 Bucharest, Romania
frecealoredana@gmail.com
Abstract. The commitment to social responsibility is closely linked to the quality of the
ethical principles followed by the banking institutions. The deficiencies in addressing the
CSR activities in banks can be best highlighted by the moral implications of the credit
institutions. The major responsibility of financial institutions, as the main agents that
lend the funds, derive from the fact that financial resources significantly contribute to
value creation in the economy, with a major impact on improving the quality of life. The
analysis of the biggest scandals in which the Romanian banks were involved highlights
both the legal and the moral dimension of corporate social responsibility that derives
from his voluntary characteristics. Starting from the CSR minimum legal obligations in
Romania, including CSR reporting, it will be established the institutional limits of this
concept, extending the analysis to the codes of ethics that works in the banking system.
Thus, the analysis will include a complex case study considering the Romanian banking
sector and it will be completed with the implications of the ethics codes implemented by
the banking organizations, in order to establish the current financial market imbalances
and the impact of CSR measures on customer satisfaction, as representative stakeholders
in this market. The purpose of this article is to investigate the ethical considerations that
underlie the financial environment in Romania, by outlining the route followed by the
Romanian banks in the post-communist period. There will be taken into account both the
banking scandals implications on the behavior of financial services consumers and the
implications of national legislation in eradicating the fraud in the system. On the other
hand, in Romania, the majority of CSR efforts were made on the imitative basis, without a
coherent adjustment to the national characteristics and without a real awareness of the
ethical banking aspects. Therefore, the ethical banking is seen as a component of business
ethics that is designed to prevent the deviations from moral norms, decisively
contributing to prevent the doubtful and fraudulent practices.
Keywords: ethics; corporate social responsibility; banks; legal; stakeholders.
Introduction
The importance of banks as the main agents between savers and those who need
financial resources is enhanced by their ability to influence the market. This is made
through an adequate transfer of CSR elements to the customer because every
investment is carefully analyzed in social, environmental or ethical terms. The financial
corporate sector has lately included the CSR practices, due to the widespread crisis in
the financial market, which destabilized the entire economy and caused deep changes
in the financial services clients’ perceptions. Thus, the i-responsibility actions of the
banks were reflected in the confidence crisis of the banking system and emphasized
the significant role that plays the ethics, as one of the key dimensions of CSR. In this
respect, the global financial sector can be viewed as the epicenter of the market
816 Strategica 2016
mechanism, while the quality of connections within the national banking system can be
a true barometer for the economic development of a country.
The dimensional analysis of CSR will consider the conflict of interest and the
transparency in reporting. In response to the stakeholder pressure, the financial
institutions have used the voluntary reporting as a useful tool in order to legitimize
their activity. The inconsistent and fraudulent reporting practices have marked the
need to establish the accurate reporting policy taking shape in various accreditation
mechanisms, international standards or guidelines for CSR reporting. The stock
exchanges recommendations in the field of transparency have a considerable impact
on CSR reports. The purpose of this paper is to investigate the CSR in the Romanian
banking system based on the ethics elements and to analyze the CSR disclosure
depending on the ethics requirements, starting from the opportunity it offers the
communication through the websites.
Starting from the moral implications of CSR for the banking strategies, it will be
attached the main CSR dimensions identified in the literature, placing a particular
emphasis on the ethical component. The ethical considerations that consolidate the
organization's reputational value can be influenced by the stakeholder’s perceptions as
representative actors on the financial market. Thus, the stakeholder theory highlights
the need to coordinate the CSR efforts with the expectations of the representative
stakeholders. While in the CSR, the report should be found the main categories of
stakeholders; there is also the code of ethics or other specific documents that
emphasize the representativeness of these categories by establishing the main
convergence measures of the stakeholder expectations in the CSR approach.
Ethical considerations about the CSR development in the banking system
The current literature revealed that the CSR concept is based on various ethical
principles, giving a number of competitive advantages for the banking institutions that
are addressing the ethical approach. Starting from the concept introduced by Bowen
(1953), the CSR theory was continuously developed, Elkington (1997) providing the
most common approach based on „the triple bottom line” theory, identifying three
main directions in the CSR construction: People-Planet-Profit with various
implications, both at individual level and at societal one (Crișan & Zbuchea, 2015,
pp.203-205). The definitions which included the “ethics” term in the CSR structure are
starting from the concept of “business ethics” (Scholtens, 2009, p.165) to the
definitions that are adjusted to the banking field, such as “the ethical banking”
(Dorasamy, 2013, p.778).
A brief investigation on this topic highlights the focus on the multidimensional theories
for the financial sector, the voluntary nature of the concept being connected with the
ethical principles. The research regarding the CSR dimensions starts from to the
multidimensional pyramid developed by Carroll (1979), referring to the basic
components of the corporate social responsibility: economic, legal, ethical and
philanthropic. This CSR structure was revised by Schwartz and Carroll (2003), who
indicate a conjunction between the ethical responsibilities and the philanthropic
responsibilities, resulting only three essential dimensions: the economic, the legal and
the ethical one.
Business Ethics and CSR 817
The position of ethics, as an essential part of the CSR, meet the involvement of
reputational issues in the CSR construction, according to which the consumer
perceptions leads to a positive or a negative image on the market. Due to the financial
downturns, the banks need to validate their reputational value through CSR practices
that prove their ethical conduct. Some scholars revealed the ethical approach in the
CSR conceptual improvement, while others concentrate on the CSR justifications.
Considering the ethical values and the potential of a moral corporate climate in the
financial industry, Norberg (2015) suggests the term of „amorality”, which is prevalent
in this sector, depicting four main categories of CSR justifications.
Starting from the primary hypothesis that “corporate social responsibility is an ethical
concept” (Argandoña & von Weltzien Hoivik, 2009, p.222), the scholars state the
multidimensional CSR role, from business ethics to social and political ethics. In order
to enhance the socially responsible behavior of the top 30 European banks by market
capitalization, Birindelli, Ferretti, Intonti and Iannuzzi (2015) attach an ethical rating,
based on 48 items to evaluate their ethical level, suitable for the banking self-
assessment process. “CSR has been part of ethical and responsible business practices
for long” (Goel & Ramanathan, 2014, p.51), but his emphasize in the actual period is
due to the globalization phenomenon and the dynamics of the financial markets.
Assuming that “the ethics we find in companies contain the same elements as the
ethics in the socio-economic context in which they operate” (Cavalieri, 2007, p.24),
there can be made a clear framework for the ethical process in the business
environment. The existing literature highlights an improvement in CSR practices
depending on the size of the banks and the competitiveness on the market,
implementing CSR strategies being made with a greater difficulty where the
shareholders’ rights prevail.
The adoption of codes of ethics is reflected in the CSR strategy through the workers`
attitudes towards their activity, the employee commitment and the organizational
engagement in the community, promoting a constant responsible corporate behavior
and a “customer-company identification” (Fatma, Rahman & Khan, 2015, p.393).
Weber (2005) has described five models of integrating sustainability into the business
strategy of banks and financial institutions. There is a special emphasis on the existing
link between the employer and the employees through the code of ethics, influencing
the employees’ sense of identification with the organizational culture, improving their
satisfaction and their commitment with the bank.
In the last years, developing an ethics-orientated business leads to creating a positive
corporate perception and protecting the clients against the employee misconduct,
establishing a climate of trust among the representative stakeholders. While Valentine
and Fleischman (2008) argue that there is a positive relationship between the
perceived CSR and the corporate ethics programs, some scholars stress the advantages
of CSR integration that “can lead to long-run profits, competitive advantage, innovative
thinking, and overall health of the firm” (Korka, 2005, p.49). The consumer behavior
and his attitude towards the bank are depending on the improvement of the CSR
practices, the ethics being perceived as an important tool in order to obtain the
reputational value and to optimize the CSR activity.
The CSR development in Romania is primarily linked to the EU integration, because
“CSR is no longer just an option for our country” (Herman, Georgescu & Georgescu,
818 Strategica 2016
2012, p.704). According to Zaharia and Grundey (2011, p.201), in the last decades, the
Romanian corporations “started to develop a behavior that fits the European acquis
communitaire and European regulations”. The evolving concept of corporate social
responsibility faces various adjustments on the banking system, depending on the
national context and the dynamism of multinationals. They have the power to
influence the local environment, establishing a constant balance between the market
forces.
Methodology
The purpose of this paper is to analyze the Romanian banking sector, taking into
consideration the most common approach in the CSR construction. The ten banks
included in this analysis are extracted from the top banks in terms of market share,
being used the data provided by the National Bank of Romania. Starting from the
current literature, this paper will focus on the main CSR indicators, identifying the
relationship between the ethics principles, the CSR strategy and the code of ethics in
the banking system. In an attempt to justify the corporate behavior, there will be
compared the CSR communication procedures, using the frequency analysis to
highlight the actual mainstream in the Romanian banking system. In order to obtain a
broad picture of the Romanian banking sector, it will be used the market share as the
major selection indicator. The choice of this sample aims at verifying the link between
CSR and ethics for the most exposed banks in the Romanian market, providing useful
information about the responsible behavior and the current practices from the sector.
The research will be based on a complex case study, developing a content analysis on
the official websites and CSR reports of the sample. In the exceptional cases, when
there are not available the CSR reports, the useful data will be obtained from the
annual reports, the codes of ethics, the governance codes or other specific documents.
The focus on the websites is due to the voluntary nature of the CSR reporting in
Romania and the trend followed by the banks to publish the CSR information on the
internet, in order to increase significantly their visibility for their stakeholders. The
disclosure area will be structured in three main parts: CSR, ethics, and corporate
governance. In particular, content related to the CSR and ethics issues were identified
and compared to establish their reliability to the topic, creating the framework for
their interpretation in the CSR context. This analysis is designed to explore the
presence or the absence of the relevant information and their frequency, the
availability of the related sections through the websites being considered particularly
important in order to emphasize the relationship CSR - ethics.
The ethical approach in the CSR analysis
Starting from the data provided by the National Bank of Romania in the annual report
2015, the top ten banks in terms of market share of total net assets are: BCR - Banca
Comercială Română (The Romanian Commercial Bank), BRD – Groupe Société
Générale, Banca Transilvania (Transilvania Bank), Raiffeisen Bank, UniCredit Bank,
CEC Bank, ING Bank, Alpha Bank, Bancpost and Garanti Bank (Figure 1). The largest
share is represented by the category of credit institutions with majority foreign capital,
CEC Bank being the only lender from the state sector. The option for market share as a
Business Ethics and CSR 819
specific criterion for the selection of the banking institutions gives the opportunity to
shape a more truthful image of the analyzed banking market. The banking sector has a
double power in the economic dynamism because the banks are able to influence both
their sector by providing models of good practice, but also other sectors, due to their
intermediary position on the market.
Figure 1. Top banks in Romania according to the market share in terms of the net assets,
31.12.2015 (BNR, 2016)
Given the fact that the ten banks analyzed account for 81% of the banking market in
Romania, it can be made relevant comparisons in order to highlight the trend of the
entire sector in the CSR field. On the other hand, a special attention will be given to the
three banks with the most increased activity in Romania: The Romanian Commercial
Bank, BRD – Groupe Société Générale and Transilvania Bank. The way in which these
banks have chosen to integrate the ethical issues in the existing CSR policy will be
correlated with the current market position and the customers’ perception of the CSR
activity, to be emphasized the bidirectional link between CSR and the ethical
component.
According to the data included in Figure 2, the majority of the banking institutions
analyzed contains references about CSR in their websites, except CEC Bank, which has
not a separate CSR section and the CSR information is not available in other published
reports on the official website. Instead, CEC Bank provides information related to the
banking ethics by the anti-fraud campaigns and by aligning the bank's CSR
communication to the disclosure and the transparency requirements. Thus, the CSR
data are available on the banks` websites in the special CSR sections, in the annual
reports or in the separate CSR reports. The access is relatively easy, with only one click
(on the Home page) for a number of three banks, by two clicks for five banks and more
than two clicks for two banks. In addition, the comparative analysis shows that while
five banks communicate data about the ethical issues, only four banks from the sample
communicate the information on corporate governance through their website.
820 Strategica 2016
Figure 2. The issues communicated by banks on their websites for the analyzed sample
The first bank from the analyzed sample in terms of market share is BCR. This bank
asserts its ethical values in accordance with the code of ethics, but there is a lack of
transparency in the corresponding publication procedures. The existence of such a
code of ethics is reinforced by specific references in the website to the organizational
principles followed by the bank and by the extract from anti-corruption policy, which
is publicly available on the website. The specific mentions on this issue aimed at
strengthening a climate of trust between the bank and the clients. There is a specific
task for BCR to maintain an honest, respectful and fair behavior to all stakeholders,
exhibiting zero tolerance for any acts that could affect the integrity of employees, by
anti-corruption measures. The main pillars that support the BCR code of ethics are
respecting the dignity, the integrity and the fair relations between the BCR employees
and the community. Regarding the strategic CSR directions of BCR, a special emphasis
is placed on the community profile, through the active involvement in the society
development, but the CSR projects are focused more on education. This situation
amplifies the philanthropic character of CSR actions at BCR, being pursued the CSR
projects with a major impact on clients, without establishing a perfect correspondence
with the ethical principles.
At BRD – Groupe Société Générale, the code of ethics is not published on the website,
being replaced by the corporate governance code, which governs the situations of
conflict of interest. The third bank from the sample, depending on the analyzed
indicator is Transilvania Bank. The bank has no mentions regarding the code of ethics
on the website but includes a section of corporate governance about the disclosure
requirements according to the EU Regulation 575/2013 on prudential requirements
for credit institutions and investment firms. The data regarding the CSR actions are
found through a blog attached to the official website, where are also presented the
major CSR projects supported by Transilvania Bank.
The only bank from the analyzed sample that public the code of conduct and a separate
CSR report through the website is Raiffeisen Bank. This is the only bank that meets the
Global Reporting Initiative framework, following the latest version of GRI (GRI4) in
developing the Annual corporate responsibility report 2014. Global Reporting
Initiative provides international guidelines in CSR reporting, being used by the
organizations and the companies worldwide in an attempt to improve the reporting
process through transparency and clarity in presenting the CSR activities. According to
Business Ethics and CSR 821
the analyzed data, it can be observed a correlation between these two documents, due
to the focus on the representative stakeholders and their needs. Thus, the code of
conduct of Raiffeisen Bank places great emphasis on integrity, honesty, and respect in
the workplace, but also on the relationships between the employees. At the same time,
the employees are one of the main pillars of sustainability of the bank, as reflected in
the CSR report. Mentions concerning the relations with the customers and the business
partners appear in both the code of conduct and in the CSR report of Raiffeisen Bank,
in order to meet their needs for information.
Ethical issues in the Romanian banking system
The starting point for the current analysis is the initial stage of CSR conceptualizing
framework as a driver of social welfare by overcoming the economic obligations and
the inclusion of ethical, legal and philanthropic responsibilities in the organizational
strategy. They emphasize both the legal issues, but also the commitment to act in
accordance with the ethical values by rewarding the society, as a particular means of
increasing the quality of life. Strengthening the moral value of the banks, the banking
ethics was divided into internal and external banking ethics, being defined as “the body
of rules and moral norms covering the conduct of banking employees (business
banking), both individually and collectively” (Fetiniuc & Luchian, 2014, p.92).
The code of ethics includes all the values and the ethical norms followed by the
banking institutions in accordance with the ethical principles supported by their global
strategies. Only five banks of the sample have a code of conduct/a code of ethics or
particular information regarding the ethics available on their website, while less than
half of them (40%) allow an easy access to information on corporate governance.
Within the corporate governance code of BRD – Groupe Société Générale, a separate
chapter is devoted to the conflicts of interest.
Although the financial crises have propelled the ethics among the key issues pursued
by the financial sector in order to regain the reputation, there is a controversial
discrepancy between the actual ethical practices and those presented by the official
statements. For example, there are major inconsistencies between the BCR situation
related by mass media and the declared mission that focus on the customer approach
by trying to regain the brand relevance in Romania. In the last years, BCR was involved
in scandals relating to the contractual terms considered by over 200 clients as abusive.
Moreover, in October 2015, the High Court of Cassation and Justice of Romania decided
by an irrevocable decision that the variable reference interest unilaterally adjusted by
this bank is unfair. Although in other processes initiated by the customers against BCR,
the High Court of Cassation and Justice of Romania established that there are not
unfair terms in their credit agreements, the National Authority for Consumer
Protection (ANPC) asked the Court to remove several parts of the credit agreements
concluded before 2010.
Among the arguments provided by ANPC in this dispute is the deficient customer
information on the calculation of the reference interest rates. At the same time, the
ANPC claims the conduct of the bank towards his customers, contrary to the principle
of good faith. Thus, since the end of 2008 Euribor dropped due to a reduction in the
reference interest rate of the European Central Bank. In these circumstances, the
822 Strategica 2016
Romanian Commercial Bank has not provided the lower interest rates to the
customers and increased the variable reference interest, which led to an increase of
the payment rates by approximately 50% higher in 2013 compared to the first rate,
although the Euribor reached almost 0%.
Other contractual terms contested by the National Authority for Consumer Protection
relate to the management and risk fees, which significantly delude the consumers.
According to ANCP, these clauses are not clearly formulated and do not provide the
real possibility of negotiating, being unilaterally modified by the banking institution
and causing financial damages to the customers. In addition, the contracts that are
subject to this dispute do not contain the specific circumstances of increasing the costs,
missing also the clarifications related to the judicial control of legality for these
increases.
Figure 3. The number of cases against banks before the Court in 2015
Volksbank had the highest number of cases before the Courts in 2015, the bank being
integrated into the structure of Transilvania Bank in January 2016. Bancpost and BCR
had also a large number of cases for the unfair contract terms, according to the Figure
3. For the banks included in the analysis, which are also in the top presented in Figure
3, it can be noticed the lack of an ethical approach on their websites. On the other hand,
the only bank with a complete code of ethics available on the website is Raiffeisen
Bank, which has as two major pillars of social responsibility: social solidarity and
sustainability.
Raiffeisen Bank Group supports the sustainable corporate management and is aware of
his social responsibility that derives from it. The bank makes publicly available the
Code of Conduct, ensuring transparency, trust and safety principles. The provisions
included in this document refer to relationships at work and colleagues in a climate of
mutual respect, honesty and integrity, the conflict of interests, data protection and
ensuring the customer privacy, the lack of tolerance for acts of bribery or corruption
and the prevention of money laundering. The Code of Conduct also refers to the major
stakeholders, the fair competition, the fairness and accuracy of the accounting
procedures, the human rights, and the environmental protection.
Contrary to the Code of Conduct presented on his website, Raiffeisen Bank was
involved in 2014 in a case of tax evasion and money laundering. In this case was also
investigated the group Alexe - Păvăleanu. The members of this group withdrew a large
Business Ethics and CSR 823
amount of money from a bank agency in Ploiești. Although the group members had no
management quality in the companies that launder money and could not perform
legally operations with the bank, they were informed of their accounts by an employee
of Raiffeisen Bank, director of the “Mihai Viteazul” Agency, Ploiești – Raiffeisen Bank.
BRD – Groupe Société Générale is facing a huge scandal involving the fraudulent loans
for important people in the Romanian business environment, current and former
directors of BRD. According to the Directorate for Investigating Organized Crime and
Terrorism (DIICOT), Romania, at the end of 2007, it was created an organized criminal
group in order to provide fraudulent loans at the BRD management level. This was
done with the violation of the domestic credit rules and those issued by the National
Bank of Romania. The BRD loans were given to individuals and/or legal entities,
materializing in a criminal activity in order to obtain large sums of money from the
subsequent commission of deception crimes. In this way, they were granted 17
fraudulent loans and a total loss of 43.5 million euros, which was the final damage of
BRD.
The responsible behavior of the banks has been driven by various scandals in which
they were involved. They caused an increase of CSR actions in order to obtain
competitive advantages, the CSR activity being considered in Romania “an actual
instrument even in the banking industry” (Mocan, Rus, Draghici, Ivascu & Turi, 2015,
p.716). The banking sector involvement in the corporate social responsibility is a
proactive activity, which is essentially linked to the need of credibility that gives the
stability of the financial industry. Thus, a positive image of the corporate social
responsibility will attract a movement in the same direction of the reputation.
Conclusions
The paper confirms the existing link between CSR and the ethical dimension for the
Romanian banking sector, with a major, emphasize on the code of ethics. The extension
of the banking activity to the CSR level is due to the ethical rules, in order to create a
reputational value and a positive image for society. The CSR management involves a
direct connection between the Codes of Ethics and the CSR strategy, the ethical norms
sustaining the responsible organizational behavior and the development process of a
bank. It was noticed a direct link between the market share and the CSR implication,
the banks from the top of the sample including various dimensions of the CSR in their
strategic development: CSR communication, ethics, corporate governance. The results
lead to the conclusion that following international standards in the CSR reporting
policy and publishing ethical and corporate governance references on the website have
a positive financial impact for the banks.
In the post-communist period, the official websites of the banks have a decisive role in
the CSR communication, the current debate stressing the lack of transparency in the
CSR disclosure. In Romania, there is a significant discrepancy in the CSR reporting
procedures, due to their voluntary character and the doubtful behavior of the banks
reflected by the media. The CSR sections are more common in the banks’ websites,
while the ethical statements are less frequent because the banks pursue the safe CSR
strategies that focus on the clients. This can be attached to a marketing strategy, the
banks being interested in improving the banking sector image as a responsible citizen
824 Strategica 2016
in contrast with the negative image suggested by the financial fails in the global
economic environment. This assumption relies on the stakeholder theory in the CSR
construction, as a future CSR approach in the strategic evolution of the financial
institutions.
The incomplete ethical framework leads to the main imbalances in the CSR policies
because strategic CSR is corresponding to a transparent code of ethics. According to
this analysis, the CSR improvement will be based on the main pillars, both for the CSR
policy and for the approved code of ethics. The current CSR framework reveals the CSR
errors in the Romanian banking system, which is in his initial stage of development.
The sector was involved in scandals relating to the abusive contractual terms,
experiencing fraudulent practices, contrary to the financial ethics presented by the
official CSR documents. The responsible behavior of the banks depends on the
correspondence between CSR and ethical values, the level of transparency in adopting
the CSR practices and the key place of stakeholders as major pillars in both the CSR
strategy and in the banks’ code of ethics.
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Business Ethics and CSR 825
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826 Strategica 2016
THE DIGITAL NGO: SOME ETHICAL INSIGHTS
Alexandra ZBUCHEA
National University of Political Studies and Public Administration
30a Expoziției Blvd, Sector 1, 012104, Bucharest, Romania
alexandra.zbuchea@facultateademanagement.ro
Florina PÎNZARU
National University of Political Studies and Public Administration
30a Expoziției Blvd, Sector 1, 012104, Bucharest, Romania
florina.pînzaru@facultateademanagement.ro
Cristian VIDU
National University of Political Studies and Public Administration
30a Expoziției Blvd, Sector 1, 012104, Bucharest, Romania
cristian.vidu@facultateademanagement.ro
Abstract. The internet presents many strategic advantages to NGOs. Most studies
investigating the relations between nonprofits and the internet concentrate on the
operational aspects and the practical influences of the internet on NGOs. Lesser attention
has been given to the ethical aspects related to the use of the internet, although being
ethical is not only compulsory but also brings many practical benefits to NGOs. The
present paper highlights two of the most sensitive ethical aspects that are associated
with the communication online of a nonprofit organization: transparency and
accountability. The two items are strongly connected. This study is a brief literature
review which helps nonprofit to better communicate online, being ethical and relevant
for their stakeholders and the public.
Keywords: NGO; the internet; ethics; transparency; accountability.
Introduction
The internet is a strategic tool for communication and information dissemination,
especially for NGOs – due to its accessibility, ease of use, and low costs. It could be an
effective channel to fundraising, to raise awareness, to engage the stakeholders and the
general audience. The effective and complex use of the internet could determine a
competitive advantage for NGOs. It also allows the public to contact NGOs, but studies
show that most nonprofit organizations use the internet as a one-way communication
tool (Messner, 2014, p.83). The complex interactions between NGOs and the internet
have been investigated by many researchers (Pohl, 2001; Hart, 2002; Kang & Norton,
2004; Sargeant, West, and Jay, 2007; Waters, 2007; Cramer, 2009; Ingenhoff & Koelling
2009; Waters et al., 2009; Curtis et al., 2010; Lovejoy & Saxton, 2012; Levine,
Zahradnik, 2012; Lovejoy, Waters & Saxton, 2012; Shier & Handy, 2012; Díaz et al.,
2013; Eimhjellen, 2013; Quinton & Fennemore, 2013; Eimhjellen, Wollebæk &
Business Ethics and CSR 827
Strømsnes, 2014; Guo & Saxton, 2014; Saxton & Guo, 2014; Saxton & Wang, 2014).
Most of the perspectives investigated have been related to operational aspects and the
practical influences of the internet on NGOs. Lesser attention has been given to the
ethical aspects related to the use of the internet.
Being ethical is “good business”, protecting organizations from a bad reputation and
communication crises. Being ethical and professional in the online communication
would bring the organization several benefits, very valuable, among which competitive
advantage, better relations with the stakeholders, or increased trust from volunteers
and the wider public. The present paper investigated all these aspects, stressing on the
sensitive ethical aspects which are associated with the communication online of a
nonprofit organization: transparency and accountability. The two items are strongly
connected. This study is a brief literature review which helps nonprofit to better
communicate online, being ethical and relevant for their stakeholders and the public.
Besides transparency and accountability, some other items, such as privacy and Big
Data, are relevant in better understanding what an ethical NGO is when considering its
online communication and operations.
Transparency
Transparency refers to the easy access of the wider public to information on an NGO,
on its aims and activities. This information is easily transmitted online, while
stakeholders or other interested parties first browse the internet for such data. Gandía
(2011) states that stakeholders should have access online to various information
related to the way an NGO is organized and functions.
Vaccaro and Madsen (2009b) classify transparency in two categories: one static and
the other dynamic. The first one refers to one-way communication of information
towards the stakeholders of the organization. The dynamic transparency does not limit
to transmitting information and disclosure of data, it also includes communication
among the stakeholders and members of the public. The second one would be
desirable and bring additional benefits to the organization.
Transparency influences the credibility of nonprofit organizations (Gálvez Rodríguez,
Caba Pérez & López Godoy, 2012, 2016) and it legitimates them (Gálvez Rodríguez,
Caba Pérez & López Godoy, 2012; Gandía, 2011). Transparency is thus related to
accountability. Gálvez Rodríguez, Caba Pérez and López Godoy (2016, pp.70-71)
synthesize the items which should be considered via the internet by transparent NGOs:
18 items referring to the profile of the organization, 14 items for performance, 8 items
for governance, 17 items for financial management, 4 items for stakeholders`
participation.
Table 1. The online transparency of NGOs
Author(s) Aspects investigated
Vaccaro and Madsen A dynamic transparency – ICT facilitated information
(2009a) sharing - determines greater openness, more
transparent operations, organizations prove their
accountability, both for their and stakeholders` benefit.
Burger and Owens (2010) The paper investigates the gap between what NGOs (in
828 Strategica 2016
Uganda) are claiming to do and what they are doing, as
an obstacle for transparency. Factors to which
transparency is mainly related are grants, capacity, and
ability, as well as beneficiary satisfaction.
Murtaza (2011) The ethical reasons for NGOs transparency are its
contribution to the society and its representativeness,
transparency about their projects, proof of correctness
in the context of the recent experiences of abuse of
power.
Gandía (2011) Potential donors are positively influenced by online
transparency.
Saxton and Guo (2014) The voluntary disclosure of financial information (in
the Taiwanese Hospital sector) is determined by the
strategy, by the size of revenues and the characteristics
of the board.
Gálvez Rodríguez, Caba Spanish NGOs have a rather low transparency. Most
Pérez and López Godoy information disclosed refers to activities, followed at
(2012) large distance by financial information transparency,
use of financial resources, and organizational
transparency.
The online disclosure of information depends on
several factors. A literature review done by Gálvez
Rodríguez, Caba Pérez, and López Godoy (2012) shows
that large organizations (mainly measured by the
number of volunteers) release more information, older
organizations tend to improve their financial disclosure
approach and are more transparent, financial
disclosure is also related to public funding, foundations
are more transparent than associations, organizations
with larger and more active boards are more
transparent. Online transparency might also be
positively related to internationalization.
Gálvez Rodríguez, Caba Online transparency strongly influences organizational
Pérez and López Godoy efficiency and financial aspects.
(2016)
Studies conducted in developing countries such as Colombia, as well as in developed
countries such as Spain, the US, and Switzerland, show that the online transparency of
NGOs is rather low (Gálvez Rodríguez, Caba Pérez & López Godoy, 2012; 2016, p.75).
Information regarding the financial management and governance is the least shared
online.
Some ethical aspects related to transparency are the scale of disclosure, the accuracy,
and completeness of the information provided. Lack of transparency in itself is not
only depriving an organization by an open image and other benefits mentioned above,
but it is also unethical – an NGO uses funds raised from the public, and influences
various categories of stakeholders – therefore it should be open in what its activity is
concerned. Not communicating with them means the organization does not feel
accountable to the public and stakeholders. Accountability is an ethical issue, too.
Being accountable, an organization takes responsibility for its actions.
Business Ethics and CSR 829
Ethical aspects related to social media communication of nonprofit organizations are
of concern for the most active and more experienced organizations in the online
environment, which are more likely to have formal or informal codes of ethics related
to the communication of their employees and volunteers on various social media
platforms (Messner, 2014, p.91).
Another ethical concern when considering online transparency is not only the topics
approached but also the extent and correctitude of information. For instance, an
organization could present in detail a certain program it has, not specifying the actual
impact of that program and its effectiveness.
Transparency and privacy are key issues in the way organizations communicate and
cooperate today (Zinovatna & Cysneiros, 2015). Both aspects influence each other.
The complete disclosure of information might lead to privacy issues. If the public is not
familiar with the transparency and disclosure policies of an organization, it could
experience privacy violation. The public should be aware of how, when, why and how
personal information is collected and used. Thus, an ethical organization makes sure
that its stakeholders are informed and are aware of its disclosure policies.
Accountability
Organizations that are accountable benefit from increased trust and better image. This
would lead to various benefits such as more effective networking and advocacy, more
trustworthy fundraising campaigns, or increased visibility to mention some of them.
Being online accountable, organizations are pro-active and responsive to their
stakeholders, which leads to better relations with them.
The first aspect that comes to mind when mentioning accountability is financial
reporting. But, since nonprofits are representatives of the society and they are active
for the society`s well-being, they are also accountable considering non-financial items,
such as outcomes, governance (Candler & Dumont, 2010; Morrison & Salipante, 2007).
Koppell (2005) proposes five dimensions for accountability: transparency, liability,
controllability, responsibility, and responsiveness. Although the model is proposed for
public administration, it could be also considered for nonprofit organizations to a large
degree. There are also several mechanisms to be considered: disclosure, evaluation,
self-regulation, participation and adaptive learning (Ebrahim, 2010). Among these,
especially disclosure, and in some extent participation and evaluation have a
contribution to the online accountability of an NGO.
Table 2. The online accountability of NGOs
Author(s) Aspects investigated
Candler and Dumont Ethical accountability – which exceeds legal provisions
(2010) – is influenced by elements such as faith,
professionalism, standards and social values.
The stakeholders, to whom organizations feel the need
to be accountable to, are donors and members, as well
as government – when considering financial resources.
The issues most often considered are the offer of the
organization, the mission, and financial resources.
830 Strategica 2016
Saxton and Guo (2011) By online accountability, organizations could reach
segments of public with which is not physically
connected and extends the level of trust. NGOs use their
websites for disclosure, but they are not promoting
these releases in order to stimulate communication.
Dialogue is identified as a key dimension of online
accountability, which allows the engagement of
stakeholders. Disclosure is related both with financial
and performance accountability.
Online accountability is positively linked to the board
performance and asset size
Saxton and Guo (2014) Since the NGOs get their funding from the public, they
should be accountable and should reveal the way they
use the funds or other financial aspects.
Tremblay-Boire and The authors developed an accountability index.
Prakash (2012) The more a nonprofit is visible in the media, the more
accountable is. NGOs tend to disclose more information
when they attract the interest of media.
The size of an organization is related to the
accountability, nevertheless, when an organization
reaches a certain size (and status), it no longer depends
on online disclosure and the accountability index
decreases.
There are sectoral differences referring to
accountability, the organizations active in education are
more accountable than others.
Dumont (2013a) The article presents a nonprofit virtual accountability
index. The components identified are a mission,
governance, accessibility, engagement, and
performance.
The engagement dimension of online accountability
diminishes stakeholder resistance.
Dumont (2013b) In the contemporary society, the stakeholder-centric
accountability is important. It is not enough to be
transparent but also interactive. NGOs use the internet
especially for pushing information and build
relationships, and less for being accountable by
presenting programs outcome and evaluating their
activity. Transparency is at the core of virtual NGO,
while online accountability is a relatively rare
approach, although organizations recognize the need to
adapt to the new requirements of the contemporary
stakeholders.
Being accountable is desirable from many considerations, and the internet facilitates
the process. Nevertheless, Ebrahim (2010) investigates the actual extents of
accountability, positing that organizations should prioritize to whom and for what they
should be accountable.
Business Ethics and CSR 831
Conclusions
Transparency and accountability online are two key issues in the strategic approach of
the internet by NGOs. They are also tightly related to each other. They are important in
order to ensure a high degree of trust, as well as the desire of stakeholders and the
wider public to cooperate. Nevertheless, NGOs tend to have a low transparency,
especially on an issue such as financial management and governance. Accountability
has many dimensions, but it is tightly related to evaluation and financial transparency.
Therefore, accountability is an item to which many NGOs fail to relate.
The literature review shows that dialogue with the public and stakeholder
involvement are key issues in developing the communication strategy online, but many
organizations fail to integrate them on their online communication platforms.
Not only being transparent and accountable are key indicators of ethics, but also how
NGOs are approaching these issues is relevant in an ethical framework. In some
situations, there is either a gap between what organizations are saying and what they
are actually doing, or/and between what they present and what they actually achieve –
for instance leaving the impression that they are implementing special programs, but
failing to report on the actual outcomes of these programs. This might be surprising
when considering that online transparency and accountability influences positively an
organization, including in what financial aspects are concerned.
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834 Strategica 2016
A CITIZEN-DRIVEN ALTERNATIVE TO CORPORATE SOCIAL
RESPONSIBILITY
Brîndușa PALADE
National University of Political Studies and Public Administration
30A Expoziției Blvd., Sector 1, Bucharest 012104, Romania
brindusa.palade@politice.ro
Abstract. Despite the existence of a small number of companies genuinely committed to
investing in sustainable products, the shallowness of the green claims of many others,
which has often been revealed in recent years, is a considerable flaw of a classic CSR
model that emphasizes the development of a corporate responsibility towards
environment and society. This is the main reason why I argue for a shift in business ethics
from a corporate- to a citizen-driven moral responsibility to build a sustainable future.
Likewise, although governments are major players in any global shift towards a cleaner
production, they cannot be taken as primary moral agents, due to electoral
considerations that may discourage them from promoting a climate legislation which
promises mostly long-term benefits, and makes “sacrifices” in the short- and middle-run.
As an alternative, I advance a triadic model, which considers the environmentally minded
citizens as the driving force of a green shift. According to this model, citizens would
pressure governments to enforce climate regulations and to monitor the green claims of
companies and business groups, by sanctioning them electorally if they fail to do so.
Governments, in turn, would be mandated to promote new enforceable climate
regulations and to provide mandatory guidelines to companies as to how to implement
new cleaner technologies. Yet, the technological innovations themselves, and the
investment in renewable energy should belong to the private sector, which has both the
expertise and the capability to create and implement new designs and technologies for
their own products.
Keywords: green citizenship; sustainability; enforcement of climate regulations;
responsibility towards the environment; interaction between civil society, the public, and
the private sector.
Introduction
Corporate Social Responsibility (CSR) has often been used by many companies as a
rationalization for building a “green image” which was instrumental in boosting their
sales and obtaining tax rewards. Basically, many companies have deliberately used the
“green” issue for maximizing their profits, according to a traditional neoliberal logic of
avoiding as much genuine societal responsibility as possible, while jumping on the
bandwagon by appearing to be environmentally friendly. The most egregious
corporate duplicity of the kind has led to the greenwashing practices of many
companies. Only last year, we learned about the large-scale strategy of emission
cheating of the notorious “environmentally friendly” German carmaker Volkswagen,
which, as I have argued elsewhere (Palade, 2016), should trigger a new approach in
business ethics and a revision of the ideal of corporate responsibility towards “people
and planet”, beside the creation of shareholder value. The hope shared by business
Business Ethics and CSR 835
ethicists such as Kenneth Goodpaster (2006) that corporations would gradually
develop by themselves an environmental conscience, has proved to be more or less
illusory.
At the same time, for obvious reasons related to the electoral cycles, governments
cannot be relied upon as the main moral agents of a green societal shift in business
ethics. They have of course the capability to enforce climate regulations and to monitor
the green claims of the corporations in order to diminish greenwashing practices, but,
in a democratic regime, they are accountable to citizens for their success or failure to
do so. Moreover, governments should maintain a dialogue with civil society, and the
latter usually has the interest and capability to pressure them to enforce better climate
legislation – a priority that is usually followed with a clearer societal conscience by
civic actors, than by politicians whose environmental motivations, if any, are usually
mixed with other interests. The elections and the interests of politicians to be reelected
are usually considered the most obvious destabilizing factor in democratic systems
(Sartorius & Zundel, 2005).
A triadic model of interaction between civil society, governments, and
businesses
The main moral agents of a societal shift in business practices should be the citizens
who have formed an environmental conscience and consequently, have internalized
the need to take action in order to put the priorities of the Earth on the top of policy
agendas. The value of intergenerational justice is better pursued by citizens than by
both governments and corporations since the former are more likely to wish to protect
the public interests than the latter’s. Therefore, We first propose a shift in the
approach of business ethics from either corporate or political to civic responsibility
towards the future of the Earth and the next generations.
Second, the interaction of citizens with politicians and governments is twofold. On the
one hand, citizens may reward or sanction governments through elections for their
success or failure to promote enforceable climate regulations and to monitor
effectively companies in the process of introducing new sustainable technologies. On
the other hand, civil society groups and organizations have the capability to pressure
politicians in order to remind their own “green” electoral promises and to enforce the
environmental legislation more effectively. Civil society may also cooperate with the
government in the attempt to promote a broader environmental education. In this
particular regard, environmental NGOs should advocate the insertion of business
ethics and environmental education as required subjects in curricula, not only in
business schools and in departments of management.
Third, there is a crucial interaction between the government and the private sector
upon which the whole enforceability of the green legislation depends on. A
government cannot provide public expertise for cleaner products since the technology
and design usually belong to the private sector. Yet, the government should take
seriously the enforcement of climate regulations and the monitoring of companies in
this respect. Likewise, it should punish greenwashing and “green” cheating behavior as
serious crimes, and reward the genuine environmental progress made by some
economic actors, while at the same time reducing the likelihood that environmental
836 Strategica 2016
taxation would lead to perverse incentives and emerging strategies of cheating
behavior in the long run (Verbeke & Coeck, 1997).
As regards strategic resources, such as household electric utilities, a government could
lawfully (e.g. through tax incentives) favor the “Ethical Electric”-like companies that
obtain the energy entirely from renewable sources, instead of those using non-
sustainable sources, thus making it easier for the former to attract customers. If more
customers subscribe to sustainably sourced utilities, through economy of scale the
price of such sustainable services will normally decrease. The same logic goes, in fact,
also for other eco-friendly products and services: they are currently more expensive
because of the prevalence of non-sustainable products on the market that makes the
former less profitable to sell. As governments increase the monitoring and accuracy of
business actors who claim to provide eco-friendly products, the “green” public label
can lead not only to safer choices for environmentally-minded customers but can make
the green businesses more profitable and the green products cheaper. Finally,
governments should set standards and priorities for businesses, based on the scientific
consensus and international agreements, and help facilitate the translation of these
priorities and norms into reality. This can be done, among other means, by setting
guidelines and targets for businesses towards the implementation of new sustainable
technologies and instituting carbon and pollution taxation and penalties. The
development of the new business models, processes, expertise, and technologies for
meeting the government-mandated targets shall remain the private sector’s
responsibilities.
Such guidelines ought to help estimate, however, the long-term benefits of sustainable
technologies on a larger scale. Such estimates can lead to new prospective profit
models for businesses, which take into account societal and global factors such as the
health of the workforce, and the impact of climate disruptions and consequent conflicts
on businesses and their customer base. Consequently, companies could also reach
profitability after introducing sustainable technologies on a larger scale, and the old
apprehension of business managers stemming from the misconception that any
practical concern for the environment must necessarily cut profits can be alleviated,
and eventually reversed.
This triadic model of interaction between citizens/civil society, the public, and the
private sector is, of course, a normative one that combines deontological with
consequentialist ethics. Yet, it is at the boundary of moral, economical, and political
theory, since it emphasizes not only rights and responsibilities but also resources and
capabilities.
Why the citizens?
To propose a citizen-driven approach to business ethics may seem rather unusual.
Why aren’t the customers considered here? Could they not relieve the corporations of
the burden of ethical responsibility and take it upon themselves? Could they not make
educated choices each time they choose a product or a service by forming a judgment
based on eco-friendly criteria?
Business Ethics and CSR 837
Yes, they can, but only as long as they are environmentally minded citizens first. As
customers, however, they may not always buy eco-friendly products, even if they are
otherwise good “global citizens” who are committed to saving the planet. Mark Sagoff
made the point that people normally act differently as customers than as citizens
(Sagoff, 1990). As the rational choice, the theory argues, as customers, they are more
individualistically driven, whereas as citizens their vision might be broader and they
may do their best to pursue the interests of their community. Buying behavior of
responsible products is a complex phenomenon, influenced by any factors (Zbuchea,
2013). For instance, they might support recycling as citizens, while they keep buying
products in unrecyclable packaging as individualistic, “rational” customers. In a less
idealistic scenario, individual customers can simply get a free ride. Consequently, it is a
mistake to leave the choice of eco-friendly or eco-harmful products entirely up to the
customers.
There is, of course, an important project to educate customers to become more
ethically committed in their choices and buy eco-friendly products. Yet, insofar as they
are customers, their tendency to revert to the “rational” economic logic and to a one-
dimensional cost-benefit analysis that forgets about the environment is to be expected,
especially since organic and eco-friendly products are still “luxury goods” that often
cost more than eco-harmful products.
Of course, the consumer behavior also varies according to other variables, such as age,
gender or income, or more psychological variables like attitudes, motivations, and
perceptions. The marketing variables related to price, quality, promotion and
availability are not the only ones to consider. Still, overall, many customers would
prefer to buy, let us say, five conventionally grown avocados at the price of three
organic ones. A reason for such a choice is that even the conventionally grown
avocados are considered healthier than muffins, for example, although they are less
healthy than the organic ones, which in turn are more expensive (Yet not as expensive
as white truffles, so as to discourage the customer to consider buying them at least
from time to time). This high variability says, however, that we can hardly rely on the
customer decision when activities that may affect the environment are at stake.
Citizens qua citizens, insofar as they are environmentally-minded, would more
consistently argue that buying eco-friendly products is more responsible than
vacillating from harmful to cleaner products because of price or other reasons. As
citizens – and especially as “green citizens” – people are more likely than the
customers to consider the priority of the Earth and the right of the next generations to
enjoy a clean environment.
Green citizenship vs. libertarian manufactured skepticism
A serious challenge for the “green citizenship” is the dominant neo-conservative
worldview based on the traditional notion that the resources of the Earth are
unlimited and “ready to be exploited” endlessly. This theory was especially popular
among economists. It derives from John Lockeˊs theory of natural rights (late 17th
century) and Adam Smithˊs economic theory (middle 18th Century). However, in view
of the scientific evidence that points to the obviously limited resources of the Earth, it
is similar to the flat Earth myth. If for early modern theorists such as Locke and Smith
838 Strategica 2016
the planet seemed capable of supporting the expansion of the human estate for an
indefinite number of generations to come, today we live on a different planet,
populated by 7.4 billion people, a great part of whom are subject to economic injustice
and are vulnerable to the climate change that is largely the effect of the carbon
footprint of others. According to the assessments made by the Global Footprint
Network in 2010 and the Millennium Ecosystem Assessment in 2005, the dual
demographic factors of population growth and wealth accumulation have led to an
economy that exceeds the natural limits of the biosphere. The Malthusian scenario,
rather than the Lockean one, is invoked by analysts of the current global economic
reality.
The philosophical worldview attached to the dated economic theory above is,
nonetheless, persistent. Moreover, there are some climate change denial groups who
rely on similar providential views and claim, for example, that the global warming has
recently stopped. This global warming hiatus thesis in particular has been disproved
by the scientific community, including an article published by a group of researchers
from the National Oceanic and Atmospheric Administration (Karl, Arguez, Huang,
Lawrimore, McMahon, Menne, Peterson, Vose & Zhang, 2015) which shows that there
is no evidence of any recent hiatus.
Figure 1. Global surface temperature anomaly time series with new analysis, and with or
without time-dependent bias corrections (NOAA, 2015)
The dismissal of most findings of the causal correlation between the anthropic use of
fossil fuels and global warming usually comes from conservative politicians, coal and
oil industry advocates, and libertarian think tanks in the United States. Denialists of the
kind choose to ignore, often by relying on pseudo-science and dated theoretical views,
the overwhelming scientific evidence for climate change and for the need of a major
global shift towards a sustainable economy.
Green citizenship, especially in the United States, has also to contend with the effect of
conservative campaigns that are aimed at undermining public trust in sustainable
development and try to disallow the setting of targets for reducing CO2 emissions and
the use of renewable energy. In that country, which has the second global footprint
after China on a global map, right wing libertarians continue to manufacture climate
skepticism and to spread uncertainty for their ideological and economical purposes,
while facts and science point more and more accurately toward the global warming
effects of human activity. So informed green citizenship also means to challenge the
voices of this “Flat Earth Society” with scientific evidence, and to expose, among its
members, the oil and gas corporations that are the main beneficiaries of such fallacious
narratives.
Business Ethics and CSR 839
In its theoretical core, the notion of green or environmental citizenship is based on the
holistic view that each citizen is a part of a larger eco-system and is able to contribute
to the preservation of the integrity of the whole. The supporters of this view intend to
foster an individual sense of responsibility for the future of the planet that leads to
environmental action. Thus, individual citizens have also (green) duties, according to a
republican conception of politics and society, not only rights, as in the liberal political
theory (Dobson & Bell, 2006).
The notion of green citizenship is currently increasing in significance and popularity. It
is not necessarily associated with any particular cultural tradition, although it may be
compatible with some religious worldviews, which endorse the value of environmental
stewardship. In practice, committed green citizens are proactive in energy saving, use
of renewable energy, waste management, and recycling items that could be converted
into reusable objects (Barr & Gilg, 2007). Some are also engaged in the public
promotion of environmental causes that help increase the awareness to the current
green issues and encourage an environmentally friendly behavior.
What governments can do for a sustainable future
Governments that are accountable to environmentally minded citizens have many
possibilities of taking action for reducing carbon emissions from enforcing climate
regulations to tax incentives for companies that provide renewable energy. At the
same time, they have the capability to offer environmental taxes relief to the
companies that use renewable energy and to monitor them in the process. They are
also capable of facilitating sustainable industry and agriculture through guidelines for
the replacement of harmful energy with renewable one, and for an eco-agricultural
land use, that would lower the impact on the biosphere and ecosystems.
a. Governments can enforce the use of renewable electric sources for household utilities
Governments control the electricity grids that provide electricity to households and
businesses. Much of the energy in the grids comes from fossil-fuel power stations,
which burn coal, natural gas or petroleum in order to produce electricity. A technology
of carbon capture and store in underground geological formation, aimed at preventing
the release of CO2 into the atmosphere, thus mitigating the effects of carbon emission
to the global warming, is not currently available and is considered risky. Long-term
predictions about underground storage security are usually uncertain and CO2 might
leak into the atmosphere (Lackner, Grimes & Ziock, 1999), thus defeating the purpose
of protecting the environment.
The cleanest and safest alternative is to provide energy only from renewable sources,
such as solar, wind, wave, tidal, and geothermal, the use of nuclear plants being more
controversial (Shrader-Frechette, 2013) and to promote, through governmental
mechanisms, companies that provide clean energy for the household utilities. This is a
particular area of action in which governments can make a difference and massively
curtail the dependence on fossil fuel power plants.
Of course, there might be hindrances, such as the support of politicians by the coal and
oil industrial groups. This is another reason why the influence and campaigns of such
groups of interests should be actively counteracted by green citizenship.
840 Strategica 2016
Environmental NGOs should watch and assess the “loyalty” of politicians to such
groups of interest and struggle for the neutralization of its harmful effects on public
policies that may affect the environment.
b. Governments should monitor businesses not only financially, but also environmentally
Another area in which governments should be stricter is the monitoring of companies
with green claims that are usually followed by environmental tax relief. If the green
claims of such companies prove to be untrue, such as in the well-known Volkswagen
case, not only the state which has cut the environmental taxes, but also the customers
who have purchased their would-be “green” products are deceived. Indeed, the effects
of the greenwashing strategies of many companies that take advantage of poor
enforcement of climate regulations are to be taken seriously in any evaluation of the
impact of environmental legislation. Governments have mechanisms of financial
supervision that can also be adapted for the monitoring of the green policies that
companies and business groups claim to promote.
c. Governments should facilitate sustainable industry through guidelines for the use of
renewable energy
Finally, yet importantly, a certain strategical assistance for companies by the
government is to be expected. Governmental policies should include not only laws, and
monitoring of their application, but also facilitating actions, such as providing
guidelines for the use of sustainable energy. Governments should develop through
public research agencies a strategy of sustainable development that should be
imparted to the private sector through a protocol that contains specific guidelines and
blueprints for sustainable industrial and agricultural activities.
Such guidelines may regard the choice of technological innovation for sustainable
development as a top national priority, as the Government of Canada, for example,
recently did . However, it cannot provide the specific content of each technological
innovation, since this belongs to the private enterprise realm. Still, the government can
do much to promote and further the ethical shift to a sustainable development, also by
explaining the reasons why economic growth is not necessarily synonymous with
development, and even less to sustainable development.
The role of the private sector in a global shift towards sustainability
a. The private sector has the expertise and structures to provide the technology for a
sustainable economy
The private sector has a key role in providing the technological innovations required
for the transition toward a sustainable economy. Yet, it is still debatable whether the
commitment of companies to CSR is always positively correlated with profitability. As
McWilliams and Siegel have argued (2001), the companiesˊ level of CSR usually
depends on many factors, such as the size, diversification, research and development,
government sales and consumer income. Likewise, empirical studies of the
relationship between CSR and financial performance or profitability have been
inconclusive, reporting positive, negative, and neutral results (McWilliams & Siegel,
2000).
Business Ethics and CSR 841
Nonetheless, the large-scale use of renewable energy and sustainable technologies is
likely to be profitable in the middle and long-run. This is not based on a classic CSR
model, but on the environmental obligation of companies to prioritize profitability
within a legal framework, that includes climate regulations, and the future costs
(including for society as a whole) of climate change, and of mitigating its effects.
Sustainable economy and development also imply a concern for the injustices and the
inequalities resulting from using the limited resources of the planet, while degrading
its air and eco-systems.
As an example, if a project of drawing energy from Saharan solar panels is to be
implemented, in the hypothetical situation where there is no political complication in
the region, according to some scientists it would be economically viable and
scientifically sound. Yet, this economic viability is usually assessed for the global North
alone, since the Southern Sub-Saharan countries are short of infrastructure and cash,
and, consequently, cannot afford to buy even energy transferred from the same region.
A global sustainable project, in which some hypothetical companies belonging to an
African Network for Solar Energy had a share, would provide at least part of the solar
energy at lower prices to the Sub-Saharan population that does not have access to
electricity. Sub-Saharan countries could also get loans for the purpose of building their
own solar energy network and scholarships in engineering for African young students
that would boost the local technological expertise.
b. Only the private sector can make the practical shift towards eco-agriculture and eco-
industry
Practical innovations designed to make industry and agriculture clean for the
environment can only be implemented by the private sector. Both eco-industry and
eco-agriculture largely depend on the activity and management of private companies,
farms, and corporations. Of course, they require cooperation between managers and
other stakeholders, since eco-industry and eco-agriculture are possible only in a
holistic, communitarian framework, in which whole-archy, rather than hierarchy,
prevails.
In agriculture, for example, the traditional practice of segregating the land use by each
farmer has impacted upon biodiversity. Eco-agriculture, by contrast, involves farming
communities that conserve biodiversity and ecosystems, and also favor eco-tourism
and other ecological services whenever it is possible. Eco-agricultural land
management is a kind of “holistic management” (Savory & Butterfield, 2015). It is also
aimed at reducing the costs of production and improving the quality of agricultural
products, thus tending to be profitable as well. In addition, farmers can also receive
benefits through programs that offer payment for eco-system services.
Could corporations become genuine civic actors on the world stage?
Global corporate citizenship is a notion that has been much discussed recently
(Schwab, 2008; Post, 2002). As James Post has explained, the emphasis on the
responsibility of corporations to society and the enriching of management education
with a public purpose occurred at a time when this kind of education was in a
842 Strategica 2016
teleological crisis: it had become strongly instrumental, and therefore more successful,
but at the same time purposeless, like mechanics without metaphysics.
Nonetheless, however, strong and noble the purpose of making a societal difference
would be, corporations are usually run by managers who prioritize profitability over
public goals. By their own design, corporations work for increasing the shareholder
value. The impact of the CSR research on the enlargement of the number of the
beneficiaries is rather controversial. This is not to say that corporations who build, for
example, factories in poor countries, pay decent salaries to the workers and implement
sustainable technologies that protect the environment are not making a difference. Yet,
the driving civic pressure towards, say, economic justice on a local or a global scale, is
more likely to come from the citizens themselves, as I have already argued here. Global
citizenship, that is citizenship committed to global civic issues, is more easily found in
citizens and NGOs than in corporations.
Concluding remarks
The classic CSR model has been based on the debatable premise that corporations
could, in a sense, change their own nature and become moral agents with civic
responsibility, especially in the context of the current environmental crisis. What I
propose instead is a complex model of interaction between NGOs and governments, on
the one hand, and governments and corporations, on the other.
Starting from the reality of the functioning and interests of the three actors, the
emphasis is on a strong legal framework for businesses and consumers, anchored in
scientific research, enforceable by the government, and with significant citizens’
oversight. To use the phrase of Allan Savory and Judy Butterfield (2015), “a
commonsense revolution to restore our environment”, which does not attempt to alter
the “natural function” of corporations, governments, and civic actors, is a goal that is
more realistic and achievable than an idealistic enlistment of all of them as a priori
members of a global civil society. This does not mean, of course, that it is not desirable
to have as many corporations and governments committed to global civic and
environmental causes as possible. However, even a normative theoretical model
should not only rely on what is desirable, if it is to be viable in a real economic and
political context.
References
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Analyzing Attitudes toward Environmental Behaviour. Geogr. Ann., 89B(4), 361-
379.
Dobson, A., & Bell, D. (2006). Environmental Citizenship. Cambridge, Mass.: MIT Press.
Global Footprint Network (2010), Annual Report. Retrieved from
http://www.footprintnetwork.org/images/uploads/2010_Annual_Report.pdf.
Goodpaster, K.E. (2006). Conscience and Corporate Culture. London: Wiley-Blackwell.
Government of Canada (2016). Sustainable Development Technology. Retrieved from
https://www.sdtc.ca/en.
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Karl, T.R., Arguez, A., Huang, B., Lawrimore, J.H., McMahon, J.R., Menne, M.J., Peterson
T.C., Vose, R.S., & Zhang, H.-M. (2015). Possible artifacts in data biases in the
recent global surface warming hiatus. Science, 348(6242), 1469-1472.
Lackner, K.S., Grimes, P., & Ziock, H.-J. (1999). Capturing Carbon Dioxide from Air.
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844 Strategica 2016
DIVERSITY MANAGEMENT: ADDING VALUE IN FAMILY BUSINESS?
Lilian SNELLMAN
Helsinki Metropolia University of Applied Sciences
1 Leiritie, 01600 Vantaa, Finland
lilian.snellman@gmail.com
Abstract. Diversity issues are currently addressed in big organizations due to
requirements of labor legislation. For this reason, there is also increasing the body of
research conducted on diversity and diversity management in big companies, whereas
research is lacking in small and medium sized companies owing to their exclusion from
such legislation. Consequently, smaller organizations tend to downplay diversity issues
although recent research findings indicate that managing diversity through integrating
diversity practices in organization strategy, making diversity effective throughout the
organization, and gaining support for diversity practices from top-management,
organizations may improve performance and achieve sustained competitive advantage.
Downplaying diversity concerns and the subsequent lack of research on the role and
effects of diversity applies also family firms as most of them are small and medium-sized.
Importantly, however, research on diversity may be of particular importance as family
firms constitute a unique group of organizations due to the involvement of family in the
business. Such uniqueness is typically created by pressures to employ family members and
involve them in decision-making and management. Consequently, family firms, while
ignoring plausible positive effects of a diverse workforce, may jeopardize strategic
business opportunities that such workforce is noted to bring along. To gain knowledge
about diversity in family firms, this study aims at shedding light on diversity in general,
exploring the involvement of diversity in family firms, and finding if family firms might
create value through diversity.
Keywords: family business; diversity; diversity management; value added; networks,
socio-emotional wealth.
Introduction
A growing number of companies have started to implement diversity practices as a
response to labor legislation, but also because companies increasingly acknowledge
that diversity may improve performance and add value to the company. Recent
research shows that in order to gain benefits from diversity, diversity should be
effectively managed by integrating diversity into the business strategy (Heres &
Benschop, 2010) and by gaining top management's support for diversity issues
(Armstrong et al., 2010). Owing to the increasing variety and rapid changes in the
composition of the workforce, and to the positive results achieved through diversity
management, it seems evident that diversity deserves increasing attention and should
be addressed in all kinds of organizations. Family firms do not constitute an exception.
What makes diversity issues relevant with respect to family firms is their global
prevalence and that they constitute the largest type of business in each country
(Nordqvist, Melin, Waldkirch & Kumeto, 2015). Importantly, family firms are also the
greatest contributors to the world’s jobs and economic prosperity (Sorenson &
Business Ethics and CSR 845
Bierman, 2009). Based on these facts, there is no doubt that if diversity is well
integrated, supported and managed by family firms, they will contribute to the
creation of employment and enhance economic development. Diversity issues in family
firms deserve special attention also because of the uniqueness of family firms arising
essentially from the involvement of family members in the business and the
subsequent overlap of family and business, which is typically seen to affect goal
setting, decision-making, and in family firms (Chua, Chrisman & Steier, 2003). Owing to
such overlap, diversity concerns may assume a special role in family firms compared to
non-family firms. Interestingly, in line with this assumption, there are some recent
indications that family firms may deal with diversity issues in a specific way due to
their unique characteristics (Singal & Gerde, 2015). Unfortunately, little research has
been conducted on diversity and diversity management in family firms leaving many
important questions to be answered and research gaps to be filled.
To advance research and gain new knowledge in the fields of diversity management
and family business in general, and to fill research gaps concerning the role of diversity
in family firms in particular, this study explores unique characteristics of family firms
stemming from the family involvement in business, and tries to find how such
characteristics may impact on the integration of diversity into the workforce and
decision-making processes and, subsequently, on the value creation and outcome in
family firms. The primary assumption of this study is that diversity may play a
different role in family firms compared with the non-family counterparts. In addition,
it is assumed that although unique family-related characteristics are seen to affect
performance in a positive way and create value for firms (Chua et al., 2003), they may
also have a negative effect on business performance. Such negative effect may take
place because unique family-related characteristics might work against the inclusion of
external diverse workforce in the organization meaning that family firms cannot reap
benefits from diversity to the same degree as non-family firms. Five characteristics
based on family involvement in business are addressed because they are in this study
regarded as the most representative characteristics of family firms and the most
significant when exploring the diversity in family firms. The characteristics are the
uniqueness of family firms, family-related resources, closed networks with strong ties
between family members, socio-emotional wealth, and economic efficiency. This study
tries to find if the special characteristics stemming from the family involvement in
business, may affect a family firm’s willingness to recruit and integrate diverse
workforce to the organization. It is assumed that unlike non-family firms, family firms
may be reluctant to involve external diverse workforce favoring instead family
members. Similarly, it is suggested that due to the specific family-related
characteristics, family firms may be less willing to include diversity in decision-making
processes. In short, the central argument is that the unique family-related
characteristics may challenge the inclusion of diversity in the organization that, in turn,
may have a negative impact on business performance and jeopardize effective
decision-making hindering the value creation in family firms.
This paper is constructed as follows: first, the concept diversity is presented. Second,
diversity management is accounted for. Third, light is shed on the impacts of diversity
on organizations’ value creation. Fourth, family firms are examined in terms of their
unique characteristics and propositions are made concerning how such characteristics
may affect involvement of diversity into workforce and decision-making. Finally,
846 Strategica 2016
concluding remarks are presented and some suggestions for further research are
made.
Diversity
The definition of diversity has been evolving from an early focus on legally protected
employee attributes such as race, gender, and age, to a much broader definition that
comprises the whole range of human differences (Jayne & Dipboye, 2004). Accordingly,
diversity refers today to differences between individuals concerning any attributes
that may lead to the perception that another person is different from the self (Roberge,
Lewicki, Hietapelto & Abdyldaeva, 2011). Likewise, diversity is used as a means to
categorize differences in thought, actions, beliefs, value sets and needs, but can also
appear in the codification of groups by skin color and educational levels (Joshi & Roh,
2006). Diversity is also be explained in terms of clearly visible differences like sex,
ethnicity, age and disability, as well as invisible differences such as sexual orientation,
social class, religion, skills, scholarly background, experience, and personality (Glastra,
Meerman, Schedler & De Vries, 2000). Visible and invisible diversity refer to the so-
called surface-level and deep-level diversity (Jayne & Dipboye 2004). Owing to the
current increasing range of perceptions on diversity, it is noted that diversity lacks a
rigorous definition and accepted measure at the organizational level (Jackson, Joshi &
Erhardt, 2003). Nonetheless, this kind of early definitional and conceptual
development state where the research on diversity finds itself in the organizational
context at the moment does not restrict theorizing or hinder conceptual development
in the field of diversity management. On the contrary, there seems to be great need of
research on diversity because organizations are increasingly incorporating diversity
management practices into the organization with the aim of reaping organizational
benefits from diversity (Heres & Benschop, 2010) and promoting socially responsible
actions and equitable employment outcomes for diverse minority groups (Fujimoto,
Härtel & Azmat, 2013) and individuals (Cox, 1994).
Diversity management
Diversity management has its origins in the United States of America in the early
1990s, and from the USA diversity management traveled to Europe, where it has
become a widely adopted organizational practice (Heres & Benschop, 2010). Diversity
management refers to a combination of management practices that offer minority
groups access to the job market and create career opportunities while it at the same
time provides benefits for the organization because the minority individuals may bring
along varied perspectives and experiences to the organization (Risberg & Søderberg,
2008). The primary objective of diversity management from the very beginning has
been to foster the attainment of the social justice through advancing individual
development and through including all kinds of organizational members to the
organization (Cox & Blake, 1991). In consequence, diversity management helps
organizations to deal with the root causes of difference, such as stereotypes, prejudice,
and inequality that may hinder the development of everyone’s full potential (Thomas,
2001). Importantly, however, in addition to promoting social justice, diversity
management increasingly strives for taking advantage of the benefits diversity may
bring to the organization (Heres & Benschop, 2010).
Business Ethics and CSR 847
Diversity management sees the differences between employees as a source of
creativity, complementarity and greater effectiveness (Stockdale & Crosby, 2004). For
this reason, organizations actively seek to benefit from the distinctiveness between
individual employees (Ivancevich & Gilbert, 2000). Consequently, diversity
management departs from the idea that every organization member is a unique
individual with an own specific contribution to the attainment of organizational goals
(Cox, 1994) appreciating, thus, the inherent value of diversity (Gilbert, Stead &
Ivancevich, 1999). Accordingly, managing diversity means understanding that there
are differences among employees and that, if properly managed, the differences may
constitute a valuable asset for the organization (Bartz, Hillman, Lehrer & Mayhugh,
1990). In more precise terms, diversity management is a managerial value-driven
strategy aiming at maximizing the potential of all employees, regardless of their group
identities such as race, gender, age, and disability (Fujimoto & Hartel, 2010). Since
diversity is regarded as more and more important for organizations, it is suggested
that diversity management should be part of the strategy in organizations (Konrad,
Yang & Maurer, 2016). When included in the strategy, diversity management focuses
on the whole organization, rather than targeted programs for under-represented
groups, and aims at creating an environment where all employees can contribute to
the common goal with their full potential (Wrench, 2005). The strategy inclusion is
important because diversity practices, in the same vain as HRM practices, when aimed
to succeed, they should fit with the overall business strategy (Chow, Huang & Liu,
2008). Drawn together, research indicates that effective diversity management may be
beneficial to organizations because it not only benefits minority groups but also
improves organizational performance by creating value through individual
contributions stemming from a diversity of the workforce.
Value creation through diversity
Research indicates that most organization leaders value diversity and recognize its
benefits (Fenwick, Costa, Sohal & D'Netto, 2011). Such benefits include improved
productivity, larger market share, innovative thinking, improved employee relations
and better customer satisfaction (Trenerry & Paradies, 2012). In addition, it is found
that companies that effectively managed diversity by eradicating racism and sexism
and by employing diverse workforce may have higher levels of innovation (Moss-
Kanter, 1983). Similarly, it is claimed that multiple perspectives arising from a diverse
workforce, can result in more creative problem solving and decision-making (Grubb,
McMillan-Capehart & McDowell, 2009). What is more, it is acknowledged that diversity
brings information richness to the decision-making leading to better decisions (Tillery
& Rutledge, 2009) and creative decision making which, in turn, tends to improve
organizational performance (Cox, 1994). Interestingly, it is also shown that
organizational performance depends on whether the workforce is able and competent
as a result of training, development practices, and non-discriminatory recruiting; and
whether the workforce is motivated, as a result of doing meaningful work; and finally,
organizational performance depends on whether the workforce has opportunities, as a
result of employee involvement practices providing employees opportunities to
contribute within the organization. In other words, workforce may contribute better to
organizational performance if it is well managed in terms of diversity-related concerns
(Armstrong et al., 2010). As for group level outcomes, it is known that diversity
increases group creativity and innovation (Singal & Gerde, 2015). Hence, it is
848 Strategica 2016
concluded that diverse groups are more innovative and creative owing to diverse
perspectives, varied information sources, and improved decision-making (Tillery &
Rutledge, 2009). Similarly, it is noted that when organizational strategy and different
HRM practices support diversity initiatives, diversity is more likely to contribute to
positive performance outcomes (Kochan et al., 2003). In more concrete terms,
organizations that manage diversity through effective HRM and diversity initiatives
may achieve advantages such as success in marketing, better problem-solving,
improved organizational flexibility, lower costs associated with decreased
absenteeism, higher job satisfaction and, above all, they may attract and retain the best
human resources (Cox, 1994).
As a whole, current research indicates that an increasing number of organizations are
adopting strategic diversity measures as they have recognized that the full potential of
diversity will only be available if different strategic diversity practices are effectively
managed (Roberge et al., 2011). It is accentuated that diversity management may not
only contribute to employees’ retention but may also significantly improve corporate
image, enlarge market share, and diminish employees’ turnover (Roberge et al., 2011).
Additionally, it is noted that if diversity practices, in addition of being integrated into
the business strategy, are also in place at operative level, organizations have better
possibilities to maximize the advantages of diversity as well as minimize its
disadvantages (Cox, 1994). The strategic approach to diversity requires also that
organization must engage themselves in a long-term commitment concerning the
implementation of diversity practices if they aim at enhancing performance in the long
run (Roberge et al., 2011). Importantly, recent research in the field is founding more
and more factors that may reap benefits through diversity. Such factors include
effective diversity-oriented leadership (Kondrad et al., 2016) and diverse management
teams (Joshi, Liao & Jackson, 2006); diversity departments, boards and officers;
specific goals and targets supporting diversity; regular measurement of the effects of
diversity management, and continuous reporting on diversity performance (Heres &
Benschop, 2010). In addition, it is found that effective diversity management requires
that training is provided across all organizational levels; that inclusive diversity
supportive climate focused on diversity recruitment is promoted, and that promotion
policies that include minority or other disadvantaged groups are applied (Armstrong
et al., 2010). Research on diversity practices indicates that the training component is
the most applied diversity practice and that it typically consists of efforts to increase
awareness of discrimination and prejudice and aims at improving behavioral skills of
employees when working with persons from different cultures and minority groups
(Jayne & Dipboye, 2004). It is also found that the implementation of diversity training
programs may provide employees opportunities to acquire the necessary awareness,
knowledge, skills, and abilities to overcome diversity-related conflicts and thereby
increase individual and group performance (Plummer, 1998). Significantly, recent
research also indicates that the success of diversity management does not only depend
on the internal implementation and fit of diversity practices, but also on how the
practices fit with the environment. Consequently, it is essential that diversity practices
are in line with internal organizational strategy and organizational characteristics,
they fit with each other, and that their implementation takes into account the
organizational environment (Martín-Alcázar, Romero-Fernández & Sánchez-Gardey,
2012). Accordingly, the context in which an organization operates seems, in addition to
internal diversity practices, to be an essential determinant of the organization’s
diversity management (Konrad et al., 2016).
Business Ethics and CSR 849
It is widely acknowledged by now that if well implemented, diversity practices may
significantly enhance the performance of diverse groups that, in turn, contributes to
competitive advantage. Importantly also, a recent literature review (see Armstrong et
al., 2010) indicates that the main business benefits generated by diversity accrue from
the possibility to recruit from a wider selection of people and retain better workers for
longer (Armstrong et al., 2010), broader market intelligence, increased
internationalization (Cox, 1994), wider perspectives on business issues, improved
community relations, enhanced company image (Nykiel, 1997), reduced costs linked to
decreased turnover and absenteeism, and increased resilience and flexibility
(Gardenswartz & Rowe, 2011). What is more, recent empirical research reveals that
increased use of diversity-oriented inclusive high-performance work systems leads to
distinguishable benefits for both employers and employees, and measurable monetary
benefits at the firm level (Armstrong et al., 2010). Additionally, empirical findings
indicate that successful diversity training seems to depend on top management
support and that if diversity initiatives are framed as challenges and opportunities,
they will gain the support from employees increasing the relevance and value of
diversity (Jayne & Dipboye, 2004). Accordingly, it is suggested that that by
appreciating diversity and inclusiveness, managers may frame collective identity that
welcomes and values the different identities of stakeholders including employees,
customers, suppliers, investors, and people from the local or global community
enhancing significantly the importance of diversity (Roberge et al., 2011).
Overall, it seems that managing diversity effectively may be a delicate and challenging
process because it requires the implementations of a combination of multiple diversity
practices (Roberge et al., 2011), support of top management (Jayne & Dipboye, 2004),
integration of diversity practices into organizational strategy (Cox, 1994), as well as
internal fit of diversity practices and fit with the organizational environment (Martín-
Alcázar et al., 2012). What makes diversity management even more challenging is the
notion that although there are several diversity practices that may enhance
performance and add value to the organization, there is neither one best way of
implementing them, nor one best practice to fit all organizations (Jayne & Dipboye,
2004).
Taken together, it can be concluded from the above revision on the advantages
diversity and diversity management that there is broad theoretical as well as empirical
evidence indicating that effectively managed diversity can reap significant benefits for
organizations. Most importantly, diversity may improve performance and
subsequently create value added for organizations. This being the case, it seems
evident that the same applies for family firms making them willing to increase
organizational diversity by recruiting and employing more diverse workforce.
Nevertheless, as family firms constitute a specific group of organizations with unique
family-centered characteristics highlighting the importance of family members in the
business, it may be assumed that family firms take a different stand on diversity and
diversity practices if compared with non-family firms that do not have any family
concerns. Consequently, there seems to be needed to shed light on the uniqueness of
family firms and, more specifically, explore the opportunities as well as challenges that
diversity may generate for family firms.
850 Strategica 2016
Family firms
Family firms can be seen as a significant empirical phenomenon in the world economy
(Fletcher, 2014). Family firms are grounded on familial capitalism with an ability to
survive in the long term owing to their specific governance practices, strategies, and
structures (Steier, Chrisman & Chua, 2015), and to their inherent capacity to adapt to a
multitude of environments differing in terms of history, culture, and institutional
development (Shukala, Carney & Gedajlovic, 2012). Accordingly, family firms have,
from remote times, constituted an enduring form of organization and are now the most
prevalent form of business organizations in the world (Steier et al., 2015).
Notwithstanding the prevalence and the common characteristics that make family
firms form a specific organizational group, it is noted that there are also significant
differences among family firms reflecting the heterogeneity that arises from diverse
evolutionary paths and institutional contexts (Melin & Nordqvist, 2007). Importantly,
however, family firms possess several significant elements that distinguish them from
non-family firms making them a unique organizational group (Berrone, Cruz & Gomez-
Mejia, 2012).
Uniqueness of family firms and diversity
As noted above family firms constitute a specific organizational group that differs from
non-family firms in terms of their uniqueness manifested typically by several
distinctive family firm-specific characteristics including family’s involvement in
business, family-based resources, close internal networks with strong ties, and
stewardship behavior, long-term perspective and business continuity, broad multiple
goals related to socio-emotional wealth, patient capital, and economic efficiency. Such
characteristics are seen to safeguard family firms’ privileged position as the most
prevalent, persistent and successful organizational forms. Nevertheless, it might also
be assumed that the uniqueness may also have a negative impact on the outcome of
family firms while challenging family firms’ possibilities of gaining business
opportunities, improving performance and creating value through diversity. In more
concrete terms, it can be suggested that certain unique family-related characteristics
may create a reluctance to recruit and integrate external diverse workforce to the
organization and involve diversity in decision-making processes diminish, thus, family
firms’ possibilities of reaping advantages from diversity.
There has been recognition throughout the history of family business research that it is
the reciprocal influence of family and business that distinguishes family business
studies from other disciplines and that accentuates the uniqueness of family firms
(Astrachan, 2003). Such uniqueness is manifested in the overlap between family and
work systems demonstrating the influence that family members may have on the
decisions of family firms, and vice versa (Schlippe & Schneewind, 2014). It has also
been acknowledged that managing the overlap between family and business and the
reciprocal relationships between both systems are crucial for the success or failure in
family business (Schlippe & Schneewind, 2014). Research shows that family firms’
uniqueness originates from the involvement of the family business owners´ family life
in the business creating strong relationships between owners, business, and family
(Gersick, 1997). Hence, in family business context family constitutes a central concept.
It and can be understood as a group of people affiliated through strong ties or bonds of
Business Ethics and CSR 851
common history and a commitment to share a future together while supporting the
development and well-being of individual members (Hoy & Sharma, 2010).
Proposition 1
The overlap between family and business, and the involvement family members in the
workforce and decision-making stemming resulting from strong relationships between
owners, business, and family, may decrease family firms’ interest in recruiting an
external diverse workforce that is known to improve performance and create value in
organizations. The family involvement in the business may constitute a hindrance for
improving performance and may, subsequently, hinder value creation in family firms.
Family resources and diversity
An emerging body of research suggests that the involvement of family members in the
business enables a family firm to accumulate certain qualities that are inherent in
families and can furnish the business with unique resources to be leveraged with the
aim of attaining competitive advantage (Amit & Villalonga, 2014). Such resources
include tacit knowledge, patient financial capital (Amit & Villalonga 2014),
organizational social capital (Arregle, Hitt, Sirmon & Very, 2007), and human capital
(Zahra, 2010) embedded in family firms. It is highlighted that if able to delineate and
leverage the unique resources into a well-coordinated management strategy, family
firms may improve their business chances (Sirmon & Hitt, 2003). Furthermore, it is
found that the unique resources may bring about the lower transaction, governance,
and recruitment costs (Melin, Nordqvist & Sharma, 2014) due to family members’
involvement in the business. Similarly, studies find that agency problems are mitigated
and agency costs reduced in family firms as the owners occupy executive positions
and, consequently, manage and monitor the business (Andreson & Reeb, 2003a,
2003b). In a similar vein, research indicates, that family-specific resources tend to be
based on trustful relationships between family members (Arregle et al., 2007), which
likewise reduces agency and controlling costs as trust obviates control. Furthermore, it
is found that in family firms, communication, and coordination costs are decreased
because family members may possess similar resources making them like-minded
(Steier, 2001). Importantly also, family members’ involvement in business contributes
with relationships that may provide family firms with a wide range of resources, such
as information, knowledge, advice, money, reputation, image, technology, and talent
(Lian, 2008). Family members typically also pursue long-term governance structures,
family-centered values, and strong culture (Singal & Gerde, 2015), and have a strong
commitment to the firm (Gersick, 1997), which tend to reduce long-term costs in
family firms. As a whole, research shows that owing to family members’ involvement in
the business and the subsequent availability of family-related unique resources, family
firms are seen to experience cost savings and perform financially better than non-
family firms (Singal & Gerde, 2015).
Proposition 2
Family resources are unique and considered as valuable while contributing to
competitive advantage through cost savings. Such savings accrue from reduced agency,
controlling, communication and coordination costs owing to the fact that family
members occupy multiple positions in the organization. Due to cost savings gained
through the high representation of family members bringing unique resources to the
organization may lead to reluctance to recruit an external diverse workforce that is
852 Strategica 2016
known to add value to organizations. Unique family-related resources may hinder
value creation in family firms.
Networks of strong ties and diversity
Typically, groups formed of family members are connected by networks of strong
resource ties that may bring about advantages particularly in such environments that
place a premium on group solidarity and unified actions (Melin et al., 2014). Group
formations based on joint emotional and cognitive elements that create a specific
adhesion (Bourdieu, 1996) seem to be vital for the existence of family firms. More
often than not, emotional adhesion gives rise to and reproduces rites that bind the
group members together (Bourdieu, 1996). Likewise, shared goal-directed activity and
expressions of positive sentiments are considered to strengthen the unity typical for
family firms (Nicholson, 2014).
Internal networks characterized by enduring relationships and strong cohesive ties
that create unity are regarded as important because they safeguard continuity,
survival, and success of family firms. However, also less cohesive networks, formed by
relatively diverse weak ties that include non-family members and other stakeholders,
play an important role in family business. In consequence, success in family business
does not only accrue from the combination of the family firm internal but also external
relationships (Arregle et al., 2007). Importantly, it is emphasized that not only strong,
cohesive, close and homogeneous ties that form networks between family members
and close friends, but also less cohesive networks formed by relatively diverse weak
ties connecting family and non-family members and other stakeholders, may play a
crucial role in business. Such networks can facilitate access to wide-ranging sources of
information and alternative viewpoints being, hence, essential for performance, value
creation and success of the firm. Research indicates that networks of weak ties are
essential also because they may connect people to special information sources they
otherwise would miss because the firm internal ties typically tend to rely on the same
information sources (Granovetter, 1974).
Unfortunately, particularly family firms that typically strive for creating and
maintaining internal strong ties, may downplay the importance creating networks with
members of the business elite (Sirmon & Hitt, 2003), members of other external
stakeholder groups, and non-family members. For this reason, family firms tend to
have restricted networks with limited network reach which is seen to constrain their
capabilities do develop valuable ties with non-family representatives (Chrisman, Chua
& Sharma, 2005).
Proposition 3
Networks of strong ties between family members may impede the advantages accruing
from networks of weak ties that connect family members to external stakeholder
groups and non-family members. Therefore, family firms may be reluctant to integrate
representatives of external diverse stakeholder groups or non-family individuals to the
family firm. Internal networks formed of strong ties between family members may
hinder value creation accruing from networks of weak ties with external diverse
stakeholders groups and non-family representatives.
Business Ethics and CSR 853
Socioemotional wealth and diversity
Family firms are known to differ from non-family firms concerning several
characteristics including overlap between family and business (Schlippe &
Schneewind, 2014), stewardship behavior (Davis, Schoorman & Donaldson, 1997),
goals and performance. Stewardship behavior is manifested by a wider set of collective
interests indicating that family business leaders become stewards furnishing greater
good of the common enterprise (Nicholson, 2014). As for performance, there is
cumulative evidence that family firms outperform non-family-firms (Anderson & Reeb,
2003a) as a result of long-term thinking, continuity of business and sustainable
relationships, all of which are seen to enhance business outcome (Carney, 2005).
Importantly, recent research shows that owing to the overlap between family and
business, stewardship behavior and sustainable thinking, business families often think
of performance in broader terms than non-family firms. Accordingly, family firms tend
not only to strive for pecuniary benefits but also aim at specific non-pecuniary goals
(Amit & Villalonga, 2014) meaning that family business goals are not just limited to
shareholder wealth maximization (Shukala et al., 2012), which is the objective of most
non-family firms, but are rather family-centered, but are rather based on joint
emotional and cognitive aspects (Bourdiey, 1996). The family firm-specific focus on
non-economic objectives can be explained in terms of socio-emotional wealth (Berrone
et al., 2012). Recent research indicates that non-economic objectives based on socio-
emotional wealth include the protection of the family brand, its heritage, and legacy as
well as its reputation and its political influence (Amit & Villalonga, 2014). It is also
found that socioemotional wealth reflects family ownership of the business (Berrone
et al. 2012), close family ties (Hoy & Sharma, 2010), strong commitment to the firm
(Gersick, 1997), specific long-term governance structures and family-centered values
(Singal & Gerde, 2015). Similarly, socio-economic wealth reflects the psychological
ownership (Hall, 2005 in Signal & Gerde, 2015). Typically, then, socioemotional wealth
is seen as essential for family firms affecting their decision-making process (Aldrich &
Cliff, 2003) and, subsequently, their performance and goal-setting. Consequently, it is
noted that in family firms major managerial choices are made with the intention of
preserving and enhancing the socio-emotional wealth in family firms (Berrone et al.,
2012).
Proposition 4
The socio-emotional wealth enhancing family-centered goals and values, family
ownership, psychological possessiveness of the business and emotionally based
decision- making may affect the recruiting process by obviating external diverse
candidates that might improve performance adding value to the firm. The socio-
emotional wealth may hinder value creation achieved by integrating diversity into the
workforce, and impede inclusion of diverse decision-makers that may bring new
perspectives in the decision-making processes in family firms.
Economic efficiency and diversity
There is increasing evidence that family business goals are multiple. At the same time
as family firms are advocating non-economic socio-emotional wealth, they are known
to exercise greater diligence in managing their economy than non-family firms
(Brickley & Dark, 1987). Such economic efficiency is typically manifested in family
firms by risk aversion, reliance on own capital, and preference for family-based
854 Strategica 2016
workforce and management. While choosing managers among family members, they
can take cost advantage in the executive search that in non-family firms is time-
consuming and resource- intensive process (Shukala et al., 2012). The economic
efficiency is also seen in that family firms may be less likely to take entrepreneurial
risks (Naldi, Nordqvist, Sjöberg & Wiklund, 2007), and avoid allocating free cash flow
to low return projects (Carney, 2005). It is also shown that family members tend to
perceive themselves as stewards or caretakers for the family-owned firm (Zahra, 2003,
Miller at al., 2008) while pursuing family-centered non-economic objectives showing
their strive for socio-emotional wealth (Amit & Villalonga, 2014). Interestingly, there
are some indications that emotional family-centered objectives coupled with the aim of
being economically efficient in terms of family-based workforce and management may
harm a family firm (Gomez-Mejia et al., 2007) because diverse resources and different
points of view stemming from diverse external groups or individuals may easily
obviate and ignored in family firms due to their family focus. Unfortunately, such
family-centered objectives and economic efficiency stemming from family-based
workforce may lead to a homogeneous outlook (van Geenhuizen & Soeatano, 2012).
As a whole, there seems to be evidence that because of their strive for economic
efficiency through family involvement in the business, family firms may avoid investing
in external relationships and assets which, in turn, may limit their possibilities to
attract relational and economic capital as well as external capabilities and expertise
that might be crucial for bringing in new competencies to the organization.
Proposition 5
Economic efficiency resulting from family firms’ reluctance to rely on external
resources and their preference for family-based personnel, may restrict family firms’
possibilities of gaining external knowledge while preventing them from recruiting
diverse external managers, experts and employees that might provide different
perspectives, multiple new ideas, and valuable knowledge adding value to the
organization. Economic efficiency may hinder adding value through diverse external
managers, experts, and workforce in family firms.
Concluding remarks
Although there is an increasing body of research on diversity and diversity
management, more research should be conducted with the aim of gaining more
knowledge about how diversity could contribute to better performing companies, and
how diversity could be managed so that it would add value to different kinds of
organizations. Especially, research on the role and advantages of diversity in small and
medium size companies is required because such companies are excluded from the
legal obligations concerning diversity and, consequently, tend to lack knowledge about
diversity issues, in general, and about benefits to be gained through diversity, in
particular. Among small and medium-sized companies family firms constitute a
particular group differing from their non-family counterparts in terms of specific
characteristics that make them unique. Such characteristics are mainly based on family
involvement in a business known to affect goals, performance, and decision-making
and, subsequently, value creation and the outcome of family firms. This study assumes
that because of such family firm related unique characteristics, diversity plays a
different role and may have different effects in family business compared with non-
family firms. For this reason, there is a need to conduct research on the role and effects
Business Ethics and CSR 855
of diversity in family firms and, particularly, focus on the characteristics that make
family firms unique. Consequently, this study aimed at exploring the unique family
firm-related characteristics and the role diversity plays in family firm context. To fulfill
such objective a literature review based on the literature on the fields of diversity
management and the family business was conducted.
The literature review indicates that several characteristics that make family firms
unique may bring about challenges when diversity is to be involved in family firms. In
more detail, the review reveals that certain family firm-related characteristics such as
family resources, internal closed networks with strong ties, socio-emotional wealth,
and economic efficiency, may hinder the integration of diversity into the decision-
making and management, and workforce in general. Furthermore, the review shows
that because of the lack of diversity in the organization, the performance may not be
improved which, in turn, affects the value creation and success of family firms.
Similarly, the review indicates that decision-making may suffer from homogenous
outlook owing to the like-mindedness of the decision makers whereas diversity would
bring in new ideas and innovative perspectives to family firms. In order to verify or
refute the assumptions arising from the previous research in the fields of diversity and
family business, five propositions are made. The propositions will be tested on
empirical data to be collected in a range of case companies by means of qualitative
interviews. To gain reliable knowledge, secondary archival data will also be used. On
the basis of the results, a model will be constructed. The model will help family firms to
overcome challenges concerning the involvement of diversity in the organization as
well as help family firms see how they may improve performance and decision-making
through diversity and, subsequently, add value to the business.
Suggestions for further research
As the study indicates, there is a great need to conduct research on diversity, in
general, and on the role, effects and challenges of diversity in small and medium-sized
companies, in particular. Although there is at the moment growing body of research on
diversity and diversity management, the field is continuously evolving and requires the
generation of new knowledge to fill research gaps. The literature study reveals that
much research has been conducted on the positive impacts on organizations accruing
from diversity whereas less is known about disadvantages or drawbacks stemming
from diversity. Similarly, there is a great body of research on good diversity
management whereas less has been conducted on unsuccessful or bad diversity
management. Research on such topics would advance the field as well as give practical
insight on what kind of management may be detrimental to a diverse organization, or
may hinder an organization to reap advantages from diversity.
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860 Strategica 2016
“IS THERE A PLACE FOR ME?”
EMPLOYMENT OF PEOPLE WITH DISABILITIES AS PART OF CSR
STRATEGY
Sara CSILLAG
Budapest Business School
Buzogany u. 10-12, Budapest 1149, Hungary
Csillag.sara@uni-bge.hu
Zsuzsanna GYŐRI
KÖVET Association for Sustainable Economies
Budapest Business School
Buzogany u. 10-12, Budapest 1149, Hungary
zsugyori@yahoo.com
Abstract. Equal opportunity, inclusion, and workforce diversity are emerging topics in
the field of Corporate Social Responsibility. Here we would like to suggest that there are
two different types of arguments to support the employment of people with disabilities –
the moral obligation and the business case. We focus on the employment situation of a
special group, people with disabilities (PWDs). Based on two Hungarian case studies
(Szerencsejatek ZRt., Grundfos Manufacturing Hungary) we show how the employment of
people with disabilities could be an immanent and strategic part of company CSR activity.
The main success factors identified are: (1) long-term commitment to the owners and the
management, (2) the development of related employment practices (e.g. development of
suitable work design), (3) cultivation of inclusive culture (4) communication: courage to
address disability as a social problem and willingness to deconstruct mental barriers.
Keywords: employment of people with disabilities; CSR; inclusive culture.
Introduction
Equal opportunity, inclusion, and workforce diversity are emerging issues in the field
of Corporate Social Responsibility (CSR). Guidelines, like the Enterprise 2020 of EU
(2011), the strategy of smart, sustainable and inclusive growth, UN Global Compact,
ISO 26000, GRI or national documents, such as the CSR Action Plan of the Hungarian
Government (2014) on discrimination-free employment, also indicate that these topics
are relevant.
We believe that there are two different types of arguments to highlight the importance
of these questions. First, providing equal opportunities and ensuring inclusion could be
considered a moral obligation to an inclusive and diverse society. It is part of the major
religions’ economic message as well: respect and caring for others, helping those in
need, solidarity, and justice (Gyori, 2012). Second, the business case of these issues is
also relevant: literature suggests that only companies with diverse corporate cultures
can utilize the opportunities of today's’ diverse society and create long-term economic
value (Markel & Barclay, 2009). Organizations that are more inclusive can build
attractive employee brands and create a loyal, motivated workforce. As a win-win
Business Ethics and CSR 861
situation, they can serve moral responsibilities while achieving economic efficiency
and other advantages (Zychlewicz, 2014).
However, we believe that the literature of CSR does not pay (enough) attention to
these themes. Statistical data prove that disadvantaged groups are still under- or
unemployed, despite the business case and the legal, moral obligations for equal
treatment and anti-discrimination (Markel & Barclay, 2009). Excluding those
disadvantaged groups from the value-creation could be considered as waste on an
individual, company, national and global level as well (Dyda, 2008).
In our paper, we focus on the employment situation of a special group, people with
disabilities (PWDs) and based on two case studies we would like to show how the
employment of PWDs could be a strategic part of company CSR strategy.
Employment situation of PWDs as a complex global/ local social problem
According to the definition of the UN Convention (2006), ‘persons with disabilities
include those who have long-term physical, mental, intellectual or sensory
impairments which in interaction with various barriers may hinder their full and
effective participation in society on an equal basis with others’ (UN Convention 2006:
4). Based on this definition, 767,000 people (7.6% of the population) were officially
classified as being disabled in Hungary (Farkas, 2011). Nearly 310,000 of these
individuals were between 18-59 years of age (i.e. were of so-called ‘active age’), but
only 18.1% of them were actually active on the labor market (KSH, 2012). In
comparison, in the EU the proportion of people living with disabilities is greater (15%
of the population) but 38% of disabled people aged 16-54 are employed, and earn
income (European Disability Forum, 2010).
In terms of societal impact, Hungary’s notoriously high level of unemployment of
PWDs means serious budgetary problems (Sharle, 2011; Kurucz & Kemény, 2016).
Being permanently inactive and excluded from the labor market has serious negative
effects on individuals themselves – hence the need, both from an individual and a
societal perspective, to provide greater opportunities and workplaces for the disabled,
and to help reintegrate them into society. Besides the open labor market and the
chance of ‘normal’ employment, there are various functioning models of employment
for people with serious health problems. The forms vary according to their method of
financing and their level of integration (Kenzie, 2009). Although there are examples of
good practice of integration (e.g. ProAbility, 2016), the existence of real and mentally
constructed barriers to employing PWDs is still evident (Hidegh & Csillag, 2013).
Recognizing this problem, the Hungarian government has been seeking to reduce
possible economic barriers to their employment recently. In particular, a compulsory
quota is mandated for employers of at least 5% of the employee population being
composed of PWDs. Legislation introduced in 2010 increased the “rehabilitation
contribution” dramatically (by 350%), which has to be paid if a company does not
achieve its quota (Hidegh & Csillag, 2014). Due to this change in legislation, there was a
noticeable increase in the level of interest of companies with respect to problems of
disability. New partnerships evolved among HR departments and NGOs specializing in
disability. Disability became one of the central issues in CSR initiatives at least in some
of the big Hungarian corporations.
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Still, the situation has not changed significantly in recent years. Research still identifies
serious barriers to employment and the low employment rate of PWDs. From the
employer’s side, the barriers can be categorized as being ‘actual’ and ‘mental’
(Banfalvy, 2005). Mental barriers of employment are (1) having a general lack of
information about PWDs; (2) being prejudiced based on the opinion that PWDs
perform poorly; (3) believing that the employment of PWDs requires significant
investment; (4) having a belief that PWDs more often go on sick leave. Thus, it could be
of vital importance to show sustainable best practices of successful corporations and
encourage companies to identify and deconstruct the mental and actual barriers.
Business case or moral obligations?
To elaborate on our arguments concerning the importance of equal opportunities,
inclusion and workforce diversity as a CSR issue, we will first review the legal and
moral obligations according to the Hungarian law and the main CSR guidelines, and
then show the potential sources for the business case.
Guidelines
According to the Enterprise 2020 Manifesto ‘… the driving force behind economic
growth, business – from small to multinational enterprises – is uniquely positioned to
help establish a more equitable, inclusive and sustainable society’ (CSR Europe 2011).
The EC stresses that ‘companies can become socially responsible by following the law;
integrating social, environmental, ethical, consumer, and human rights concerns into
their business strategy and operations’ (EC 2011). For further definitions, the
European Commission adduces some guidelines and principles that the Commission’s
CSR strategy is built upon. Table 1 shows the PWD-related parts of the most important
international guidelines (UN Global Compact, 2000, ISO 26000, 2010, Global Reporting
Initiative G4, 2013).
Table 1. International guidelines
UN Global Compact GRI G4 (indicators in the Specific
ISO 26000 issues
principles Standard Disclosures)
Human Rights Human rights: Human rights:
(Principle 1 and 2) - Due diligence, - G4-HR3: Total number of incidents of
- Human rights risk situations, discrimination and corrective taken
- Avoidance of complicity, actions
- Grievance resolution,
- Discrimination and vulnerable groups,
- Civil and political rights,
- Economic, social and cultural rights,
- Fundamental principles and rights at
work
Labour (Principle 6) Labor practices: Labor practices and decent work:
- Employment and employment - G4-LA1: Total number and rates of
relationships, new employee hires and employee
- Conditions of work and social protection, turnover,
- Social dialog, - G4-LA2: Benefits provided to full-
- Health and safety at work, time employees that are not
- Human development in the workplace provided to temporary or part-time
employees,
- G4-LA3: Return to work and
retention rates after parental leave,
Business Ethics and CSR 863
- G4-LA9: Average hours of training
per year per employee,
- G4-LA11: Percentage of employees
receiving regular performance and
career development reviews,
- G4-LA12: composition of governance
bodies and breakdown of employees
per employee category,
- GA-LA13: Ratio of basic salary and
remuneration of women to men by
employee category
Organizational governance:
- Diversity
- Non-discrimination through the whole
organization
National governments’ legal regulations also deal with the situation of PWDs and in
2014, Hungarian government launched its CSR Action Plan where non-discriminative
employment is one of the three priorities.
As it is in evidence modern democratic societies have expectations toward business
concerning PWDs and other disadvantaged groups. Companies the most powerful
actors of the modern economy should deal whit diversity, solidarity and justice.
Practically gender, ethnicity, cultural and age diversity is the very nature of global
society and economy.
Arguments for business case
In a diverse society workplace, diversity and inclusion should be natural or at least a
moral obligation. It seems that companies need legal regulations (such as quotas) and
other motivating factors (like bottom-line impacts) for taking responsibility for the
inclusion of PWDs. That is why some research looks for the economic advantages
companies can gain with inclusion and responsible behavior (Gyori & Ocsai, 2014).
However, this line of thought can lead to the instrumental usage of CSR and to the
‘ethics is good business’ or ‘ethics pays’ idea.
Diversity and inclusion have many potential impacts on companies’ behavior and
performance. A more diverse organization can be more flexible by adapting more
effectively to changes. Diversity can be a source of gaining new ideas and continuous
innovation, improves proactivity. Multicultural teams can reach higher effectiveness in
creative tasks because of the different viewpoints skills, abilities, and experiences.
Divergence could be an asset to performance. Altogether literature suggests that profit
could increase as a result of enhancing diversity and inclusion, because: (1) loyalty,
sensibility and motivation of employees increases; (2) consumers will be more loyal;
(3) NGOs, media and other stakeholders will not attack company; (4) risk of legal
aggravation decreases; (5) the reputation, image of company improves; (6) company
can achieve governmental subsidies as governments and international organizations
treat CSR and non-discrimination more seriously (Cohen & Warwick, 2006; Doane,
2005; Frynas, 2005; Vogel, 2006; Kotler & Lee, 2005; Paine, 2000; Gyori, 2012).
Sen (1993) suggests that the ‘business case’ or ‘ethics pays’ is one of the reasons for
behaving responsibly. However, that is not the only reason. Responsible business
activities mean a competitive edge in the short and long run too, only if ethicality is
864 Strategica 2016
based on a real commitment and not on this expectation. The commitment sustains
moral values even in the case of temporary decreasing profitability. Competitive edge
is measurable or more specifically perceptible if we measure performance in more
dimensions. We have to take into account practical, social and environmental effects
besides financial ones (Gyori, 2012).
Previous research in the field, justifying research scope and method
Kuznetsova (2012) suggests that there is limited practical research studying how
companies address the inclusion of PWDs in the workforce in their CSR strategies.
However, in the last couple of years, there are some studies focusing on the field.
Some studies focus on the business or moral case for integration. Demuijnick (2009) in
his normative paper argues that it is a moral obligation for companies, firstly, to accept
their moral responsibility with respect to non-discrimination, and secondly, to address
the issue with a full-fledged program for diversity. Based on a case study he suggests
that companies should establish responsibility for diversity results, as firm ethical
commitment and support from top management make diversity programs effective.
Hart (2009) also suggests that in the case of diversity and inclusion, the business case
needs to be supplemented by strong, proactive legislation, and worker involvement.
Markel and Barcley (2009) concluded that although strategic incentives and
imperatives are important, the problem of under-employment of PWDs needs to be
addressed as a social imperative. Zychlewicz (2012) argues for the financial case - her
main conclusion is that only strategic CSR activities connected to PWDs influence the
level of profits and supports the business case. Similarly, Werner (2009) – analyzing
five CSR actions focusing on excluded target groups, among them PWDs – suggests that
CSR programs which are part of the core operations of the corporations (‘built-in’) can
create a real business case.
Bennett (2010) interprets the result of a pilot employment project of 16 PWDs in the
UK. She highlights the advantageous cultural impact of the pilot project. Houtenville
and Kalargyrou (2012) survey 320 companies of the hospitality industry - their results
indicate that the policies that would encourage more hiring of PWDs are employer tax
credits and incentives, flexible work schedules, and awareness training. Bengioshu and
Balta (2011) – based on a Delhi study conducted with 100 representatives of the
hospitality industry - suggest that employing PWDs would improve service quality,
efficiency and reduce costs. To build on these findings, we examine two case studies in
Hungary.
Case study methodology and practical details of preparing the case studies
We used case study methodology to examine the topic from different viewpoints
(Baxter-Jack, 2008). We wanted to analyses the present state of anti-discrimination
and inclusion strategy, policy and practice of two different companies, as well as the
process by which we are in this present situation. One of the companies, Grundfos is
the subsidiary of a Danish enterprise, the other one, Szerencsjatek has a state
monopoly to distribute lottery games and sports bets in Hungary. They work in
different sectors, for different markets and have significant differences in
Business Ethics and CSR 865
organizational structure, aims, and mission. For the two case studies, we used the
following structure:
- CSR strategies and activities of the companies;
- History and present state of employment of PWDS;
- Aims and motivation of hiring PWDs, its connection to CSR activities of the
companies;
- Main factors of success and potential problems of this responsible business activity.
We prepared the case studies in the spring of 2016, based on corporate websites,
corporate documents (codes of conduct, sustainability reports) and getting
information from interviews with different leaders responsible for CSR and HR.
Case studies
Szerencsejatek Zrt1 is the largest gaming service provider in Hungary. It has exclusive
rights to distribute lottery games, sports bets and prize draw tickets throughout the
entire country. The company is state-owned and was established in 1991. The number
of employees was 1,542 in 2014. Szerencsejatek is the member of two larger
international organizations of game organizers: European State Lotteries and Toto
Association, and World Lottery Association.
CSR strategies and main CSR activities of the company
Szerencsejatek won the recognition of Transparency International in 2015 for open
and sincere communication of their values and principles on responsible gaming,
employment, procurement, anti-corruption, and risk assessment. From 2010, they
have a separate CSR department, in 2014, they established an independent
organization for dealing with sponsorship and public donation. Because of its core
business and competence, responsible gaming is the main part of its CSR activity.
History and present state of employment of PWDs
Szerencsejatek’s scratch card sale network, employing only people with disabilities
was established in 2003. During more than a decade, the network has grown over 180
people on 100 different places (particularly in food stores, health care institutions, and
markets). Since 2014, they have hired deaf and hard of hearing persons as well
(besides physically disabled). On December 3, 2015 (International Day of Persons with
Disabilities) they signed a cooperation agreement with FESZT (Hungarian Association
for Persons with Disabilities) and ONCE (Spanish National Organization for the Blind)
for enabling the employment of PWDs, for sensitization of society on the topic and for
sharing national and international best practices.
Aims and motivation of hiring PWDs
The original aim of Szerencsejatek was to give a work opportunity to people who could
not get a job for years because of their health situation and have difficulties in social
integration. Szerencsejatek would like the serve as a best practice for other companies
1
Based on company website: www.szerencsejatek.hu and annual reports.
866 Strategica 2016
as well and raise society’s awareness: “The degree they can integrate employees with
disabilities into their day-to-day lives is an important index of successful societies.
Where integration into the job market is successfully accomplished, people with
disabilities can also more effectively integrate into society. When the charity network
was launched, our objective was the creation of open market type employment. In this
framework, we employed colleagues with disabilities in the charity scratch card
salesperson positions who were sufficiently able-bodied to be capable of working
successfully in trade.” (Imre Rosner – Head of Charity Department)
Szerencsejatek makes connections between employing PWDs and other CSR activities,
such as donations from income to good causes. The subject of inclusiveness and anti-
discrimination is among the main ethical principles and valid for all business partners
and consumers as well. In 2013, 2014 and in 2015 they also won the “Disabled-friendly
Workplace” recognition.
Main factors of success and problems
On an individual level, these PWDs can leave their homes and do meaningful work. It
means an opportunity for social integration and a functional lifestyle.
The scratch card sales staff at Szerencsejatek is treated as partners and their
suggestions, opinions are taken into account. Every colleague can join the corporate
sports days and Christmas end-year party. As an employee with a disability said: “It is
very good that we were invited to the party. It is not usual. It is surprising that the
company and other employees treat us as human beings.”
PWDs are very pleased and motivated for complying with ethical and labor norms, for
retaining their job and for supporting each other. On training courses PWDs and other
employees meet, gain connections and opportunities for communication, it is the part
of the sensitization program for all employees. They would like society to accept the
scratch card sale network and the employment of PWDs in general as well, so they
organize and participate in events and conferences and use media as an instrument for
social education. For the players, they made a leaflet and plan to introduce a new
sensitization scratch card, which will teach about the importance of social integration
and acceptance of differences.
Grundfos is a global leader in advanced pump solutions and a trendsetter in water
technology. Headquartered in Bjerringbro, Denmark, the firm annually produces more
than 16 million pumps. It was established in 1945 by Poul Due Jensen and the
ownership is still connected to the family (86.6% owned by Jensen Foundation,
11.3% by the Jensen family and 2.1% by employees). Currently, Grundfos Group is
present in 56 countries and has 19 thousand employees. It has production facilities in
Denmark, China, and Hungary. The Grundfos Manufacturing Hungary (GMH) Ltd. is one
of the biggest subsidiaries of Grundfos: altogether four production facilities in two
cities (Székesfehérvár and Tatabánya), employing 2020 people.
Business Ethics and CSR 867
CSR strategies and main CSR activities of the company
Grundfos has an impressive record with CSR. In 1994, when Karen Jespersen, the
Danish minister of social affairs started the campaign ‘it concern us all’ to mobilize
private companies in order to address unemployment and social cohesion, she was
inspired by the inclusive practice and CSR activities of Grundfos (Habish et al. 2005).
Grundfos has been considered as the ‘typical example of the sound old Danish
company than in practice had shown how it contributed to the solving of the societal
problem while serving its own agenda’ (May et al. 2007:92). Today in their
sustainability statement they concentrate their efforts on six focus areas: Sustainable
Product Solutions, People Competences, Environmental Footprint, Workplace,
Community and Responsible Business Conduct (Sustainability Report 2015). The
group prepared their first sustainability report in 2001, they have been supporting the
UN Global Compact since 2002. In 1989 Grundfos was the first pump manufacturer in
the world to be certified according to the ISO 9001. Grundfos received various
international and national CSR rewards, among others for Best Inclusive Workplace
Practice Award (ILO), European EFQM Award, CO2 Reduction Award and CSR
Communication Award (both in Denmark), for being a Disability Friendly Workplace
and Best Workplace (both in Hungary).
History and present state of employment of PWDS
It has always been a part of Grundfos CSR to take care of people with reduced work
capabilities or PWDs. In 2015, 2.2% of the worldwide workforce was employed on
special terms (the global goal is at least 3%). The rehab unit in Hungary has been
operating since 2001 to provide employment for PWDs. During the first ten years 2-
3% were employed on special terms, but in 2011, after an increase of the amount of
’rehabilitation contribution’, the figure went up to 5%. Currently, GMH has 120 PWDs
employees, using a unique ‘rehabilitation through employment’ practice. In addition to
the workers in the flexible workshops, employees with physical, intellectual, and
mental health disabilities hold a wide range of jobs at the company from production to
research to administration. Grundfos sees the employment of PWDS as a complex
social issue: in 2008, Grundfos published a guide, “Get a grip on practice” which offers
practical guidance to companies, politicians and local authorities on how to promote
an inclusive labor force.
Aims and motivation of hiring PWDs
In Hungary, the initial motivation of hiring PWDs was to follow the idea of the founder
of the company. The first production facility is Tatabánya built in 2001 was very
accessible from every aspect (unique in Hungary at that time), and Grundfos took the
issue so seriously that it relocated its special Danish rehabilitation line to the
Hungarian factory.
In 2009 the management of GMH decided to hire a social worker responsible for
special job design for the daily support of PWDs - and all employees who have health
problems. The 120 PWDs have a special performance evaluation system, have different
compensation packages and the HRM pays special attention to the development of
career opportunities. Grundfos core values relate directly to PWDs: Being flexible (e.g.
adjusting the distribution of labor to the ability of the PWDs); always paying attention;
868 Strategica 2016
measuring, analyzing and developing processes; and innovating (e.g. finding new
possible white-collar jobs for ambitious PWDS). Being part of an international
trendsetter company is another important motivation as well as receiving various
awards for their inclusive practice. Nowadays being an inclusive workplace is an
immanent part of GMH’s brand: no employee question the presence of the rehab unit’s
or the place of the PWDs in the company.
Main factors of success and problems
The main success factors are the strong commitment of owners and top management
and the commitment of GMH management. Another success factor is the continuous
development of inclusive corporate culture (all managers throughout the company
take a training course on the company’s diversity values that includes discussions on
PWDs) and flexibility, systematic analysis and innovation practice in the daily
processes. The general view is that costs and benefits break even.
There are some difficulties identified. However inclusive the culture is, there are
sometimes prejudices on the shop floor. In busy times line managers will give a lower
priority to these issues. Sometimes it is hard to match the needs of the employees on
special terms and the needs of the company, such as high qualifications and work pace
– GMH sometimes has recruitment difficulties in finding PWDs. It is also difficult to
find the balance between fairness and flexibility to PWDs and ensuring justice among
employees and PWDs employees.
Table 2. Summary of findings from the two case studies
Szerencsejatek Grundfos
CSR strategies and main CSR Responsible gaming, Sustainable Product Solutions,
activities of the company Responsible employment, People Competences, Environmental
Social engagement, Footprint, Workplace,
Sponsorship, Community,
Environmental Responsible Business Conduct
responsibility
History and present state of since 2003 Grundfos since 1968
employment of PWDS Today 180 people GMH since 2001
(11,7%) Today 116 people (5%)
Various awards for best Special HR systems
practice Various awards for best practice
Aims and motivation of Successful labor market To follow the idea of the owner
hiring PWDs and society integration of International standards
PWDs Quota in Hungary
Became immanent part of the
corporate culture
Main factors of success Long-term commitment, The commitment of the Grundfos
Real work integration, owners and management
Communication, continuous development of inclusive
Social education corporate culture and HR practices
flexibility,
systematic analysis and innovation
accept a break even
Potential problems and Low awareness, Prejudice
pitfalls prejudice and ignorance Busy production periods
of society Recruitment difficulties
fairness and flexibility
Business Ethics and CSR 869
Discussion and interpretations
Based on the two case studies we would like to suggest some learning points. Firstly, to
highlight the importance of international best practices: in both cases, the
international practice (in the case of Szerencsejatek it is the practice of ONCE, in the
case of GMH it is Grundfos) motivated the Hungarian company to start employing
PWDs, and then the Hungarian companies adapted and developed the practice. To
disseminate best practices and encourage a kind of ‘flexible adaptation’ could be one of
the important factors.
Secondly, paying attention to international CSR reporting standards, such as ISO,
Global Compact, and GRI, could be another important point. On one hand, the
systematic measurement and evaluation, as well as the reflective practice connected to
international standards, could be good ways to develop the practice of employment of
PWDs. In GMH they say that is important to measure and to see the balance of inclusive
employment and decide afterward. On the other hand, applying and receiving
international and national awards (connected to CSR and being an inclusive
workplace) could not only create a stronger corporate brand (and produce economic
value), but it is also important for employees as well as it suggests that they are
creating significant value by working together every day as equal partners.
Thirdly, the employment of PWDs is a complex HRM process, which requires
continuous adjustment and long-term commitment. The key point of the adjustment is
to find the best recruitment channels (Szerencsejatek), to develop special HRM
systems -not only work design, but performance evaluation, compensation, and career
management (GMH). This requires strategic planning, development, a daily presence
(e.g. the social worker in GMH) and flexibility. An inclusive culture should be cultivated
and continuously encouraged (with events, training, communication).
Fourthly, the personal motivation and commitment of the owners, as well as of the top
management are vital, but the role of HRM is also important as well as the commitment
of shop floor managers. Furthermore, courage and innovation are important factors. In
Hungary, where mental barriers and preconceptions of disability are still clearly
present in society, employing PWDs and putting them on the shop floor or the shop
requires courage. Both companies indicate a broader desire to change the thinking of
business partners and society.
Conclusion
Based on our research both moral and business case is a consequence, precondition of
successful employment of PWDs. Leaders should make the initial decision based on
commitment, and everyone with a stake should make their financial, professional,
personal and other necessary investments throughout the whole process. With careful
planning and implementation employing PWDs can be profitable, or at least break
even in both business and moral terms. The main success factors identified are: (1)
long-term commitment to the owners and the management, (2) the development of
related employment practices (e.g. development of suitable work design), (3)
cultivation of inclusive culture (4) communication: courage to address disability as a
social problem and willingness to deconstruct mental barriers.
870 Strategica 2016
Employing PWDs is a real chance for taking CSR seriously within and out of the
organization. These companies have a great social mission as they serve as good
examples for others as well. The successful job integration of PWDs can help them to
integrate into society.
Acknowledgments: The preparation of the paper has been
supported by Proability 2009-2014 HU08 Ösztöndíj Program.
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Business Ethics and CSR 873
CSR IN E-RECRUITMENT AND ITS USE BY LARGE POLISH
ORGANIZATIONS
Jacek WOŹNIAK
University for Finance and Management
55 Pawia St., Warsaw, Poland
jkwozniak@tlen.pl
Kinga WOŁODŹKO
University for Finance and Management
55 Pawia St., Warsaw, Poland
kinga-wolodzko@wp.pl
Abstract. Although Poland in not a leader in the use of ITC technologies, some data has
shown that the new EC countries are leaders in applying these technologies in Human
Resource Departments, and recruitment is one of the first areas in which this happens.
One of the advantages of applying ICT in e-recruitment is broadening the scope of
information used to improve the organization’s image. Activities from the scope of
Corporate Social Responsibilities are usually recommended as a tool for improving
employer brands, as it is commonly accepted that young professionals are responsive to
the organization’s involvement in these fields. Although discussions about if and why
companies should be active in CSR are still inconclusive in the sciences, management
scientists clearly state that CSR improves an organization’s employer brand and
informing about CSR is beneficial for its recruitment process. Although informing about
company CSR activities is in vogue in the Polish media and popular branch reports, some
research suggests that entrepreneurial involvement in CSR in Poland is superficial and
much lower than popular opinion holds. The article proves that e-recruitment tools, and
CSR information, in particular, are less widely used by big organizations than the public
believes, and that information concerning CSR activities improves organizational
employer brand. Two types of data are used for this: the results of an e-survey concerning
the perception of company attractiveness as an employer based on its CSR activities (a
sample of 1054 young Polish professionals and students), and direct observation of 300
websites of the biggest Polish enterprises. Less than 30% of the biggest companies publish
information about their CSR activities on their websites, while for about 2/3 of potential
candidates, such information would attract them to submit their application to this
potential employer (ceteris paribus). The importance and implication of CSR involvement
for general theory and for understanding the scope in which CSR and ICT and HRM tools
are used in Poland are discussed.
Keywords: CSR; CSR in Poland; e-recruitment; employer branding; ITC methods in HR.
874 Strategica 2016
Introduction
Recruitment with the use of ICT – a widely utilized HRM tool –is standard practice in
all kinds of organizations. We should, therefore, expect that it will base on the available
scientific knowledge concerning image formation by employers, hence specifically on
activities of a symbolic nature for potential candidates. CSR research and the role that
media and professional reports assign to presenting CSR-related activities suggest that
well-managed organizations should make wide use of these tools, also for creating
their image as employers.
The goal of this text is to establish whether this suggestion is applicable also for large
Polish enterprises. The article presents the results of two empirical studies. The
websites of 300 of the largest enterprises in the country were observed to check how
many of them use modern tools during e-recruitment, and specifically – how many of
them describe their CSR-related activities on their websites. The second study verified
whether potential candidates in Poland are sensitive to CSR-related information, i.e.
whether placing such information on their website increases the attractiveness of the
enterprise as a potential employer. An e-questionnaire filled out by 1054 young people
verified that information concerning CSR activities increases the attractiveness of the
enterprise as a potential employer not only among people professing the same values
but also among bigger groups of respondents. Monitoring of websites, however,
showed that the largest Polish enterprises do not make full use of the possibilities e-
recruitment offers.
The text is organized as follows. The first part describes Corporate Social
Responsibility and presents a discussion of the utility of activities in this area for
business, and for business in Poland in particular. Part 2 describes arguments for the
belief that placing easily accessible information about CSR activities on websites a
rational strategy during e-recruitment. Part 3 presents the methodology and research
hypotheses, and part 4 the results. Part 5 discusses the results and presents
conclusions.
Corporate Social Responsibility as a tool for creating a positive image of the
company
The concept of Corporate Social Responsibility (CSR) was introduced under this name
in the mid-1950s, although CSR practices were relatively widely in use in the XIX
century (Husted, 2014). It was defined as the responsibility an enterprise had its
impact on the environment in which it functioned, at first personified by the
entrepreneur or CEO, but later taken to mean the activities of the enterprise as a
whole. This company environment is generally divided into the closest surroundings
(local community), own employees, the natural environment and variously
marginalized groups. Any of a company’s activities aimed at improving the situation of
these stakeholders are considered CSR activities.
An ongoing discussion continues whether enterprises should take into consideration
their impact on their environment and care for its well-being, and for what reason. A
second issue concerns whether the company should be a good citizen because this is
considered right (autotelic CSR), or because CSR activities are “rewarded” and improve
Business Ethics and CSR 875
the company’s well-being, for example, its financial status or market share (CSR
activity is instrumental), which could be phrased as “doing good leads to being well”
(Margolis). Extreme positions on this issue – that companies should care only for
shareholder profit (Friedman), or that they should adhere to the legal and moral
norms of all community members “over and above” what is required – are reconciled
by showing that respect for such norms (and informing about the significant costs of
doing so) is advantageous to shareholders, so CSR activities have instrumental value
(Berrone & Gomez-Mejia, 2009). However, reviews of research on the relationship
between CSR investment and a company’s financial effects lead to unequivocal
conclusions. In roughly 50%, the relationship between “being good” and “being well”
(CSR involvement and positive financial results of the company) is positive, 25% find
no relationship, 20% a mixed one, but in 5% –the relationship is negative (Berrone &
Gomez-Mejia, 2009). This data leads us to an alternative explanation for management
investing in CSR. The reasons are not so much future financial rewards, but a surplus of
resources (slack resource mechanism), or else a discretional decision made by
managers with no direct connection to future rewards (good management mechanism)
(Kang, German & Grewal, 2016).
Although current research shows that a good CSR reputation has promising effects for
economic returns (Godfrey, Merrill & Hansen, 2009; Kang, German & Grewal, 2016),
studies usually assume that CSR investments are significant, and hence that the
company will not be suspected of consciously manipulating public opinion. CSR
credibility is rarely taken into account as a factor in research, as it is common
knowledge that manipulation of this kind has a destructive effect on reputation
(Woźniak, 2014a). The manipulation problem is even more significant as companies
frequently engage in CSR activities in response to public outcry caused by company
“errors”. To be precise: research has shown CSR activities to correlate with a
company’s previous CRI (Corporate Social Irresponsibilities) (Flammer, 2013; Kang,
German & Grewal, 2016).
There are no agreed on definitions of the list of possible CSR target groups, the scope of
CSR activities, or the scale of a company’s financial or other involvement. In practice,
organizations use CSR – understood as an umbrella concept describing several
unrelated areas of the company’s potential involvement – mimetically. In other words,
they consider that CSR activities help in creating a positive image because some
organizations and the media think this way.
Interest in CSR is large and growing, not only in the academia but in business as well.
Consultancy reports declare that 93% of world’s largest enterprises formally report on
CSR (KPMG, 2013), not only from the US but also from the rest of the world. E.g., 69%
of large companies in India reported CSR activities, and in 2009 15% of the CSR
reports in the world were published in China (Marquis & Qian, 2014).
In Europe, the average level of involvement of business in CSR is lower than in the US,
an explanation for which is sought in differences in how the role of the state is defined.
An even lower involvement level should be expected in Poland. It is now commonly
acknowledged in Poland that CSR-related activity is necessary for improving company
image. The KPMG report (2014) showed that 96% of respondents from large and
medium enterprises accept that business has responsibilities with respect to social and
environmental issues. Nevertheless, only 46% of companies from the study actively
876 Strategica 2016
take part in CSR activities (KPMG 2014). This research, as most consultancy reports on
the Polish market, is based on small (unrepresentative) samples (e.g. KPMG, 2014 –
101 respondents). Large samples yield different data – in 2011 only 31% companies
(from a representative sample of 850 companies with over 4 employees) were
acquainted with the concept of CSR, but only 2/3 of them declared involvement in CSR
activities (PARP, 2011). Since 2009 Poland has a CSR Forum, much publicized by the
media, which collects reports from enterprises concerning examples of good practices
for CSR. The scale of activities has increased from about 100 in 2009, through over 400
in the years 2013-2015, up to over 800 in 2016 (c.f. (PulsHR, 2016)), which in itself
illustrates the limited role of this phenomenon.
We may expect Polish enterprises to increase gradually CSR involvement, especially as
– and this should be emphasized – Polish companies (particularly the largest ones)
currently have at their disposal a surplus of financial resources, which are not
reinvested due to the slowing down of the economy. Research, however, has shown
that entrepreneurial involvement in Poland in CSR is superficial (Leszczyńska, 2011):
employees know nothing of the activities communicated in CSR reports of their
companies – these are designed purely for PR purposes. Additionally, some data
suggests that this attitude of management boards – expectancy without investment –
seems rational, as Polish clients are not interested in the CSR activities of companies,
not only in their role of clients (purchasers of goods) but also in their role of job
candidates (Bołtromiuk, 2009).
Internet recruitment
E-recruitment has been shown to be the most dynamically developing group of
recruitment tools. Access to the Internet has ceased to be a barrier both for business,
as for job candidates, so technology has ceased to be a barrier in using e-tools
(Woźniak, 2014b, 2014c). The advantages of using e-recruitment – from presenting an
image of a modern business, lowering the costs and time needed to contact the right
candidates, gaining access to a wide range of potential candidates and a global pool of
talents, up to tailoring information about the company to profiles of desired candidates
– have made this kind of recruitment a management standard. We should, therefore,
expect it to be common practice for large organizations – which we assume should be
espousing a modern approach to HRM – to harness the whole potential of e-
recruitment tools.
In 2008, scientists were already stressing that Poland is not a leader in the use of ITC
technologies (Runiewicz-Wardyn, 2008), and existing data confirms that this has not
changed (Woźniak, 2016). Only 2/3 of Polish enterprises have their own website, and
only 16% businesses employing over 10 persons declared in 2015 that they use their
website for recruitment purposes, as reports the State Statistical Office (GUS). This
situation is different for the largest businesses, employing over 1000 people. GUS
reports that nearly all of them (91%) have their own website, with 63% declaring they
publish information about job vacancies on it (Woźniak, 2016).
The justification for focusing on the existence of websites and their use for recruitment
purposes is that the website is the basic carrier of information significant for the e-
recruitment process. The main advantage of one’s own website for e-recruitment is
Business Ethics and CSR 877
that it gives the freedom to choose and build the message to be presented, with the use
of a rich palette of selectively addressed means of communication:
- differing in form – from gamification, games, films or lower-density contents;
- specialized in content – addressed to different audiences;
- adjusting content credibility to the desired candidate with the use of different
methods – from personal testimonies given by “those similar to me” (e.g. in blogs),
through group statements (data concerning career paths of groups which are natural
reference groups for the desired candidate), up to reports by experts.
We can therefore expect that the opinion – expressed basing on research on European
enterprises in 2009 (Strohmeier & Kalbs, 2009) – that new EC countries are leaders in
the application of these technologies and modern managerial knowledge in Human
Resource Management, signifies that the largest businesses in Poland will be making
full use of both ICT in HRM practice, as well as other managerial tools, for achieving
economic and image-related benefits in e-recruitment processes.
Marketing research suggests that value for (potential) employees is created through
both the functional (instrumental) as the symbolic features of the company brand, and
recruitment literature stresses that both the functional and symbolic features of the
job are of high importance for potential candidates (Lievens, 2007). However, a
company which is building its e-recruitment communication strategy is limited in the
way it can present its functional features (salary levels; such organizational
components as place, times, flexibility, length of working hours, how the workplace is
equipped, material benefits, etc.; or potential for growth and promotion), because most
of them are determined by the market or rigidified by company culture. Symbolic
features – the prestige of working for a given employer, or the image that certain job
carries for different social groups, or how consistent the job is with the image one has
of oneself – are largely at the discretion of management. Accordingly, we should expect
that businesses would use a wide range of tools for developing a positive image in the
area of its symbolic features, as the costs of doing so are relatively low.
We assume therefore that large companies in Poland – whose size is an indirect
testimony of their being well managed and of having the necessary resources to
successfully implement sound management practices – will be using CSR for
recruitment purposes. This, in turn, will be reflected in their website content. If this is
not the case, it is worth checking whether this decision is rational, i.e. whether
potential candidates are insensitive to information about the company’s CSR activities.
In other words, maybe the company has nothing to gain – at least in the area of
recruitment – from being a good citizen.
Research assumptions and hypotheses
The above analyses have shown that according to scientific data, we should expect
information concerning CSR activities to appear systematically on the websites of the
largest (assumed to be well managed) Polish enterprises. We may also suppose that
during e-recruitment, modern image-building tools – such as games, personalized
contact with candidates, or increasing the credibility of information presented using
marketing knowledge – will also be a universal phenomenon. On the other hand, we
may fear that the Polish job market does not expect CSR-related information, or that
878 Strategica 2016
the involvement of Polish companies in CSR is so superficial that information
concerning CSR activities will not be used in e-recruitment. The second line of
argumentation has led us to formulate two hypotheses, which were verified through
direct observation of the internet sites of 300 of the largest Polish enterprises,
distinguished on the basis of the “500” list published in n o2907 of the weekly
“Polityka” (the most respected Polish weekly journal in 2013).
H.1. The great enterprises in Poland relatively infrequently use technically advanced e-
recruitment tools and communication techniques.
H.2. The enterprises in the study relatively infrequently place information about CSR
activities, which would be easy to find by potential job candidates, on their websites.
A separate study – concerning the effect of a company’s CSR-related activities on its
attractiveness as an employer – was conducted to determine whether the decision of
large enterprises to place CSR related information on websites is rational. An e-
questionnaire was used to gather the opinions of potential job candidates to verify the
hypothesis that potential employers’ attractiveness increases under the influence of
information concerning their involvement in CSR-related activities.
H.3. Information about an enterprise, which the young person is taking into
consideration as one from among several comparable employers, concerning its
involvement in CSR-related activities, increases the attractiveness of this employer.
The survey was conducted in the Spring of 2014, by e-questionnaire on
www.studentswatch.pl (a special portal for e-research with the largely young
audience, where participation in surveys is “paid for” by gamification systems). The
respondents were 1054 young Poles, mostly women (65% of the sample), employed
on different types of contracts (70%). The respondents were relatively young: 57%
aged 21-30, 14% aged 31-40; 16% over 41 years old, but only 24% were on a full
parental support (declare “no actual need to work for money because of parental
support”). More than 40% of the sample had already completed their tertiary
education, the rest were still studying. The sample is not representative for any
important strata of Polish society, but it gives some information about the opinion of
young Polish job applicants or future professionals.
55% of the respondents know nothing about CSR (only 11% declare the knowledge,
and an additional 27% declare that they have some knowledge, but do not know
exactly what CSR is about). It should be stressed that in the case of our study, the low
level of knowledge about CSR is an advantage. When analyzing website content for the
purposes of testing hypothesis 1, “technical” sophistication was understood in two
ways: (1) the use of tools specific for advanced forms of internet recruitment, and (2)
the use of non-CSR related communication tools, i.e. typical marketing tools used to
increase the impact of advertising. This means that two groups of criteria were
selected for analyzing image-related sophistication in e-recruitment: (1) The use of
classic means of increasing marketing effectiveness, such as testimonials,
personalization of contact and English language version of the website (Woźniak,
2014c), and (2) for hypothesis 2 – references to CSR-related activities.
The most significant advanced e-recruitment tool is a web-based application form (for
collecting curriculum vitae), currently the only effective means for automatically
Business Ethics and CSR 879
preselecting applications; however, we also expected the occurrence of games and
gamification-based methods (Woźniak 2015ab).
Research results
We should note that no new tools such as games or gamification were observed. Of 300
websites, 49,3% (148) allowed job applications to be made via an online form, 44,3%
(133) asked candidates to send their documents using email. Some of the websites
offered both possibilities, while others – which were not conducting recruitment for
any positions at the time – did not offer any possibility of sending in CVs. We should,
therefore, consider the technical sophistication of e-recruitment in large Polish
enterprises to be low, as stated in the first part of hypothesis 1.
The websites of the enterprises studied did not widely feature any photos, descriptions
or contacts details to employees, which would be a natural way of developing
testimonials (the testimony of people similar to us). This information was placed
respectively on web pages 53, 45 and 47 (17,7%, 15,0% and 15,7% of websites). The
chairperson/president’s photo and name appeared more frequently – on web pages 84
and 112 (28% and 37,3% websites).
Personalization of contact was sought even less frequently – the chairperson’s email
address was featured on only 20 websites (6,7%). Brief profiles of the recruiting
person appeared 17 times (5,7% websites), while their email address was more
frequent, often among the contact details of people from various company
departments.
At the same time, it was common for distance to be “shortened” – in approximately 1/3
of the websites, position announcements, and texts used the popular “you” (similar to
the French “tu”), and only 10% websites used the polite “sir/madam”(“vous” form).
The dominant form used was the impersonal third person plural, e.g. “Interested
persons are asked to send in their CV by email”.
Astonishingly, almost half of the job announcements were multilingual – visible after
clicking the language tab and switching the whole website to other languages. Different
language options for the whole website, or in the job announcement browser, were
available for 134 websites (44,7%).
To summarize this short review of chosen indices of the image sophistication of
websites, we may acknowledge part two of hypothesis 1 as confirmed, although not to
the same extent for the different marketing tools, i.e. enterprises are selective in their
use. It is difficult to ascertain, however, whether these classic tools are used for the
purposes of recruitment, or for image building, as tools utilized purely for recruitment
are observed far less frequently.
CSR-related data is even more disquieting. The various CSR areas were measured with
a different number of indices, varying as to significance level and reliability (from
general declarations, through examples of typical activities, up to non-standard
solutions). Two questions were used as a measure for ethical business practices; 6 for
the environment; 4 for local communities; 3 for marginalized groups; and 6 typical and
880 Strategica 2016
16 unusual questions measured pro-employee activities. We were surprised to find
that even typical activities for the benefit of employees are relatively rarely presented
(under half of the websites declared they promote career development, offer training
or fund education; less than ¼ declared that the company offers additional benefits or
medical packages; and under 5% offered non-standard solutions – such as flexible
working hours, canteens or support for parents of small children or sportspeople).
Pro-environment activities were mentioned relatively frequently, 1/3 of the
businesses feature a separate tab on their websites for this issue. However, specific
information about “small” pro-environmental activities (e.g. saving office paper or
waste segregation) or support for chosen environmental projects were to be found on
less than 1/5 of websites. The indices were built as a mean of percentages of questions
from the same area, i.e. giving equal value to information about typical or less-typical
activities.
The general level of involvement in CSR-related activities, however, is low – which
should be set against expectations related to CSR involvement expressed by potential
employees. Two comparisons were conducted, measuring (1) the percentage of
respondents for whom information about involvement in CSR would increase the
desire to give a given enterprise first place from among a list they are applying to, and
then (2) the percentage of those who declare they participate in activities
implementing these values. We should emphasize that respondents answered the
question: “Will the following information, which you find on the company’s website,
increase your desire to apply as a first choice for a job in it”, with the assumption that
they have several equally good job positions to choose between. The high risk of
unemployment for young people made such a presumption necessary; the study could
yield answers concerning the symbolic component of job offers (the functional value of
the competing offers were assumed as similar).
Table 1. Information concerning CSR-related activities and expectations of potential
candidates – from (Wołodźko, 2014)
CSR area
Environment
communities
Employees
Charities
Ethics
Local
Average percentage of answers in the group
Percentage of websites with information
about the given CSR area from among a total 29,8 21,4 24,3 18,4 16,4
of 300 websites
Percentage of respondents declaring increase
in the company’s attractiveness as an effect of
48,0 65,5 68,1 61,3 67,21
the given CSR area, from among a total of
1054 respondents
Percentage of respondents who declare a
51,6 39,4 63,6 45,0 70,7
given value to be of personal significance
from among a total of 1054 respondents
Business Ethics and CSR 881
The above results allow us to state that enterprises do not use information about their
CSR-related activities to increase their attractiveness as employers, although it would
have increased in the eyes of almost two-thirds of a 1054 sample of young internet
users who participated in the study.
Discussion of results and conclusion
The above data confirms that the use of modern tools for increasing attractiveness is
relatively low in large Polish enterprises. The cause seems to lie in the lack of difficulty
in finding desirable candidates, rather than in a lack of marketing knowledge. A case
for this is made by the fact that some of the marketing solutions on websites are
relatively sophisticated – e.g. distance shortening or availability of different language
versions on almost half the websites. Apart from these single examples, however,
website sophistication – both in the technological, as the marketing sense – is low.
Limited information concerning CSR activities, when set against the increased
attractiveness for potential candidates of employers who do present such information,
suggests that knowledge concerning employer branding is also insufficiently applied. It
is especially surprising that information about employee benefits is so minimal, as both
common knowledge and personnel marketing theory consider these highly effective as
a recruitment tool. The low level of this index is partly an effect of the adopted
research tactic, which assigned a low value to general information concerning whether
a company cares for its employees, or teaches, develops and promotes them. It was
assumed that such information would not differentiate enterprises, as it is commonly
found on websites and so is unconvincing for potential candidates. However, even if
the index were to be built on the most typical activities in this area, it would be lower
than 50%.
The fact that there is a high percentage of respondents who declare that values
associated with the various CSR areas are important, suggests that not informing about
CSR activities during e-recruitment is a managerial error, justifiable only by the ease of
the job market in which these enterprises function. There is, after all, no reason to
suspect HR departments of the large enterprises to be incompetent, or lacking the
technical means to place this information on their websites.
At the same time, there is a clearly visible group of about 20% of enterprises that take
advantage of the possibilities informing about CSR activities offer in building a positive
image. These companies appear in all CSR areas and generally describe specific
activities, rather than just making general declarations. This suggests they are well
aware of how image-building tools should be applied, and this bodes well for the
further development of strategies of this kind.
It should be emphasized that – though observation of websites unequivocally confirms
that enterprises make limited use of the possibilities that management knowledge
offers concerning employer image – opinions concerning the irrationality of this
behavior are based on a survey of a large but accidental sample of young people. We
may expect their sensitivity to CSR-related information to be high in comparison to
that of candidates the large enterprises seek, e.g. mid-aged professionals. In other
words, it is the inappropriateness of the group whose expectations were gathered
882 Strategica 2016
which is the source of the observed discrepancy between facts and expectations – and
this is the first limitation of the conclusions we have drawn from this study.
A second significant limitation of the study is that different image-related information
is treated as equivalent. A more conclusive analysis, however, should be based on
information that distinguishes a given employer (given website) from the websites of
other companies it competes with for employees, and on an assessment of the
credibility of this information. Enterprises compete in separate niches of the job
market. Adjusting their image-building tools requires, on the one hand, an analysis of
the expectations of potential employees in these niches, and on the other, a relative
analysis – of information from other companies and the credibility of this information.
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Fostering Entrepreneurship
through CSR
Fostering Entrepreneurship through CSR 885
SOCIAL ENTREPRENEURSHIP AND DISCLOSURE OF NON-FINANCIAL
INFORMATION. EVIDENCE FROM THE EUROPEAN UNION
Stefano AMELIO
University of Insubria
2 Via Ravasi, Varese, Italy
stefano.amelio@uninsubria.it
Abstract. The aim of the paper is to analyze the status of non-financial information
disclosure in the European Union in order to evaluate the level of acceptance of social
responsibility practices. The research is divided into two sections and the approach used
is mainly theoretical and qualitative. In the first part the UE financial and non-financial
information regulations is analyzed; the European Union launched a process of
harmonization – in order to reduce the variability of accounting rules by issuing
important Directives – then subsequently it moved to the standardization process,
consisting in the adoption of a single set of accounting principles to be applied uniformly
to all businesses: the Regulation (EC) No. 1606/2002 is part of the standardization
process (It must be applied in its entirety across the EU) while the Directive 2014/95/EU
is part of the harmonization process (it sets out a goal that all EU countries must
achieve). The Directive 2014/95/EU states that “large undertakings […] shall include in
the management report a non-financial statement […]” thus making mandatory the
preparation of non-financial statements. In the second part of the research, not
considering the firm only as a system for the production of financial/economic value but
also as economic social actor which operates in a social environment to which it belongs
and with which it interacts, the concept of social entrepreneurship is explained
associating to it a unique role in efficiently contributing to the achievement of
sustainable development goals. Social entrepreneurship belongs to the entrepreneurs
who draw up the social balance, required or permitted by the UE legislation. For this
reason, the introduction of obligations in disclosing non-financial information (i.e. the
drafting of the social balance) in a corporate social responsibility point of view, could
lead to the increase of entrepreneurship, with positive consequences in the creation of
tangible benefits to both the business community and the global community.
Keywords: non-financial information; social balance; social entrepreneurship; UE
Directives; UE Regulations.
Introduction
Social entrepreneurship could be defined as “the way of using resources to create
benefits for the society” while the social entrepreneur is “the person who seeks to
benefit society through innovation and risk taking” (Tracey et al., 2007). As
consequence, social entrepreneurship is “the field that allows observation of how
social problems can be solved in a sustainable way (Crisan & Borza, 2012). The role of
the social entrepreneur is to identify social problems inside the company and to solve
them in order to reach the sustainable development goals (Drayton, 2002). Social
886 Strategica 2016
entrepreneurship belongs to the entrepreneurs who disclose non-financial information
along with financial information in a corporate social responsibility point of view.
Over the years, an increasing number of companies have voluntarily presented social
balances. It is complex to provide a single definition of the terms “social balance” and
“social entrepreneurship”. In relation to the last term, a literature review in the
academic field and in the UE legal framework will be deeply explained in the
subsequent sections (Social Entrepreneurship in the context of the Directive). As
regards to the first term, to provide a general definition, it is necessary to start with an
important assumption. According to the European Commission, “a social enterprise is
an operator in the social economy whose main objective is to have a social impact
rather than make a profit for their owners or shareholders. It operates by providing
goods and services for the market in an entrepreneurial and innovative fashion and
uses its profits primarily to achieve social objectives. It is managed in an open and
responsible manner and, in particular, involves employees, consumers, and
stakeholders affected by its commercial activities”. In light of this, it is difficult to
delimit the field of social enterprises and consequently, it becomes difficult to find a
general definition of social balance. As previously shown (Amelio, 2016), to provide a
full definition of social balance, it is preliminary to start from the general concept of
balance. The term balance can have different meanings depending on the purpose for
which the document is drawn up and the objects that have been taken into account. In
fact, we can have corporate balance, extraordinary balance, consolidated balance, the
balance of mission, social balance, and sustainability reports. The social balance is the
output of a process of social responsibility reporting and it allows making known the
value created in the face of the social costs incurred (Di Stefano, 1990). It often
happens that the documents resulting from the reporting process are named
differently, but with similar content, or, on the contrary, that documents with the same
designation present completely different content. In relation to the names used in the
operational reality, we can find in particular the following expressions:
- social balance;
- balance of mission;
- balance of mandate;
- sustainability report;
- balance of participation;
- environmental report.
Thus, it is arduous to track down a single comprehensive definition of social balance.
Shifting the focus to the UE side, European legislators partially solves the definitional
problems in the Directive 2014/95/UE. In this context, the EU defines the social
balance as “a non-financial statement containing information to the extent necessary for
an understanding of the undertaking's development, performance, position and impact of
its activity, relating to, as a minimum, environmental, social and employee matters,
respect for human rights, anti-corruption and bribery matters”.
In the past, the UE has adopted IAS/IFRS with the instrument of the Regulation. In this
document, the IAS 1, par. 14 states that many entities could present, outside the
financial statements, social reports, and social statements. The main problem is that
these documents are outside the scope of IFRSs and, consequently, the connection
between IAS/IFRS and social responsibility could be considered faint (Amelio, 2016).
Fostering Entrepreneurship through CSR 887
Therefore, to increase European social sensitivity, it is necessary to consider another
regulatory act the Directive 2014/95/UE.
Only in 2014, the UE has issued the Directive 2014/95/UE that has introduced the
obligation of non-financial information for certain categories of companies. This could
lead to an increase of entrepreneurship, with positive consequences in the creation of
tangible benefits to both the business community and the global community.
Starting from this premise, the aim of the paper is to analyze the status of non-financial
information disclosure in the European Union in order to evaluate the level of
acceptance of social responsibility practices.
The approach used is mainly theoretical and qualitative and the research is divided
into two sections: in the first part, the UE financial and non-financial information
regulations is analyzed while in the second one the concept of social entrepreneurship
is explained associating to it a unique role in efficiently contributing to the
achievement of sustainable development goals.
The UE financial and non-financial information regulations
On the UE’s institutional site, it is possible to note that the UE achieves the aims set out
in the treaties by several types of the legal act: Regulations, Directives, Decisions,
Recommendations and Opinions.
- “A "regulation" is a binding legislative act. It must be applied in its entirety across the
EU”;
- “A "directive" is a legislative act that sets out a goal that all EU countries must achieve.
However, it is up to the individual countries to devise their own laws on how to reach
these goals”;
- “A "decision" is binding on those to whom it is addressed (e.g. an EU country or an
individual company) and is directly applicable”;
- “A "recommendation" is not binding. [...]. A recommendation allows the institutions to
make their views known and to suggest a line of action without imposing any legal
obligation on those to whom it is addressed”.
- “An "opinion" is an instrument that allows the institutions to make a statement in a
non-binding fashion, in other words without imposing any legal obligation on those to
whom it is addressed. An opinion is not binding. It can be issued by the main EU
institutions (Commission, Council, Parliament), the Committee of the Regions and the
European Economic and Social Committee. While laws are being made, the committees
give opinions from their specific regional or economic and social viewpoint”.
In order to achieve full integration of markets aim and, consequently, to achieve the
full integration at the international level, the EU has, over the years, issued a series of
Regulations and Directives. In particular, for our purposes, it becomes crucial to
investigate the measures taken in order to achieve the standardization of accounting
practices.
As discussed previously (Amelio, 2016), the EU has launched, over the years, a process
of harmonization and standardization (Rossi, 2007). Standardization could be
explained in the adoption of a single set of accounting principles that all businesses
888 Strategica 2016
must uniformly adopt; Harmonization represents the intermediate solution which
consists in reducing the variability of accounting rules between different countries,
increasing consequently the comparability in accordance with national accounting
traditions; with the harmonization, then, there is not the total imposition of uniform
rules, but freedom of choice between different options is left to the individual country
(Marchi, 2004).
Harmonization and standardization are consequential stages of a convergence process
that has as its starting point with the harmonization and, as a point of arrival, the
standardization (Bandettini, 2006). The EU followed both stages of the convergence
process: it started from an harmonization process aimed at reducing the differences in
accounting practices, by issuing two important Directives (Abate, Rossi & Virgilio,
2008, Dezzani, 2006) (in particular the IV and VII Directive, respectively, in terms of
the financial statements and consolidated financial statements), applied differently in
the various member countries so that at one point it was no longer adequate to ensure
the objective of comparability.
To achieve the standardization aim, the EU has adopted the IAS/IFRS international
accounting standards developed by the International Accounting Standards Board
(IASB), introducing them progressively within each member country with the
instrument of the Regulation. In particular, the introduction of them was realized in
2002 with the Regulation (EC) No. 1606/2002, which was followed by the Regulation
(EC) No. 1725/2003 and a number of other regulations (so-called "homologation")
issued to regulate the practical application of IAS/IFRS into Community. In particular,
with the Regulation No. 1606 of 2002, the EU has made IAS/IFRS compulsory for the
consolidated financial statements of listed companies from the corporate balance for
the current year started from the 1th January 2005, as well as for banks and insurance
companies.
IAS/IFRS are not immediately applied in the European Union. They undergo an initial
technical examination by a committee of experts named EFRAG and one of political
nature by a committee of representatives of governments called ARC. For its
Community approval, the document must also pass the scrutiny of the SARG, appointed
by the European Commission decision 2007/73/EC, whose function is to advise the
Commission on the objectivity and the neutrality of EFRAG. Exceeded then the control,
the accounting policy is approved by Regulation by the ministers of the Union and it
obtains immediate effectiveness in all Member States. In addition, official
interpretations SIC are subjected to the same proceedings.
It is possible to summarize the current situation in the following terms; the EU adopted
a "two-way" strategy. For European companies "global player", the Commission
decided the timely adoption of high-quality accounting standards, subject to
recognition in the international markets. The Regulation 1606 makes, therefore,
required the adoption of IAS/IFRS in the preparation of the consolidated financial
statements of listed companies, since 2005. For other companies, the EU continues to
pursue the goal of accounting harmonization via the legislative instrument of
Directives, subjecting IV and VII Directive to a process of improvement and
modernization.
Fostering Entrepreneurship through CSR 889
In connection with a social dimension, the IAS 1, par. 14 (introduced by the UE
Regulation and mandatory only for certain categories of enterprises) states that “Many
entities also present, outside the financial statements, reports and statements such as
environmental reports and value added statements, particularly in industries in which
environmental factors are significant and when employees are regarded as an
important user group. Reports and statements presented outside financial statements
are outside the scope of IFRSs”.
The preparation of this document is not mandatory; furthermore, if the company
chooses to draw up the social balance, it is outside the scope of IFRSs and
consequently, it does not meet a standardized regulation that would allow reaching a
socially international comparability of social statements.
The UE, in order to harmonize the international disclosure of non-financial and
diversity information by certain companies, has adopted the Directive 2014/95/EU.
It might be interesting to analyze and compare the recipients of the Directive with
respect to the recipients of the IAS/IFRS Regulation. The Directive is primarily
addressed to the Member States, which will have to “bring into force the laws,
regulations and administrative provisions necessary to comply with this Directive by 6
December 2016”. Furthermore “Member States shall provide that the provisions
referred to in the first subparagraph [the provisions referred to the States laws] are to
apply to all undertakings within the scope of Article 1 [the article that refers to the
non-financial statement] for the financial year starting on 1 January 2017 or during the
calendar year 2017”. The Directive, then, is secondly directed to only certain large
undertakings and groups: the recipients of the Directive do not coincide exactly with
the companies adopting IAS/IFRS, for which, the only link with social responsibility is
that provided in par. 14 and, for this reason, the preparation of the social balance is not
yet mandatory.
Evidence from the EU: the Directive 2014/95/UE
Since 2011, the UE have stressed the importance of social communication by
companies. In particular, as recalled by the European Parliament and the Council of the
European Union in the Directive premises “In its communication entitled ‘Single
Market Act — Twelve levers to boost growth and strengthen confidence — “Working
together to create new growth”’, adopted on 13 April 2011, the Commission identified
the need to raise to a similarly high level across all Member States the transparency of
the social and environmental information provided by undertakings in all sectors. This
is fully consistent with the possibility for the Member States to require, as appropriate,
further improvements to the transparency of undertakings' non-financial information,
which is by its nature a continuous endeavor”.
This need was reiterated in the Commission communication entitled ‘A renewed EU
strategy 2011-14 for Corporate Social Responsibility’, adopted on 25 October 2011.
After 2 years, on 6 February 2013, the European Parliament, with its resolutions
‘Corporate Social Responsibility: accountable, transparent and responsible business
behavior and sustainable growth’ and ‘Corporate Social Responsibility: promoting
society's interests and a route to sustainable and inclusive recovery’, “acknowledged
the importance of businesses divulging information on sustainability such as social and
890 Strategica 2016
environmental factors, with a view to identifying sustainability risks and increasing
investor and consumer trust. Indeed, disclosure of non-financial information is vital for
managing change towards a sustainable global economy by combining long-term
profitability with social justice and environmental protection. In this context, the
disclosure of non-financial information helps the measuring, monitoring and managing
of undertakings' performance and their impact on society”.
“Thus, the European Parliament called on the Commission to bring forward a
legislative proposal on the disclosure of non-financial information by undertakings
allowing for high flexibility of action, in order to take account of the multidimensional
nature of corporate social responsibility (CSR) and the diversity of the CSR policies
implemented by businesses matched by a sufficient level of comparability to meet the
needs of investors and other stakeholders as well as the need to provide consumers
with easy access to information on the impact of businesses on society”. Since that
time, the European institutions recognize the need “to establish a certain minimum
legal requirement as regards the extent of the information that should be made
available to the public and authorities by undertakings across the Union”.
This objective is achieved through the adoption of IAS/IFRS (from the point of view of
the financial information) and the adoption of a mandatory regulation on non-financial
information. In particular, in relation to this second objective, as recalled by the
Directive “In order to enhance the consistency and comparability of non-financial
information disclosed throughout the Union, certain large undertakings should
prepare a non-financial statement” having a minimum content in social and
environmental terms.
“In providing this information, undertakings which are subject to this Directive may
rely on national frameworks, Union-based frameworks such as the Eco-Management
and Audit Scheme (EMAS), or international frameworks such as the United Nations
(UN) Global Compact, the Guiding Principles on Business and Human Rights
implementing the UN ‘Protect, Respect and Remedy’ Framework, the Organization for
Economic Co-operation and Development (OECD) Guidelines for Multinational
Enterprises, the International Organization for Standardization’s ISO 26000, the
International Labor Organization’s Tripartite Declaration of principles concerning
multinational enterprises and social policy, the Global Reporting Initiative, or other
recognized international frameworks”.
It is important to emphasize that, in line with the ‘think small first’ principle, the
addressees of the Directive are not all, but only the largest companies. This because
“The European Council, in its conclusions of 24 and 25 March 2011, called for the
overall regulatory burden, in particular for small and medium-sized enterprises
(‘SMEs’), to be reduced at both European and national levels, and suggested measures
to increase productivity, while the Europe 2020 Strategy for smart, sustainable and
inclusive growth aims to improve the business environment for SMEs and to promote
their internationalization”.
To increase the consistency and comparability of non-financial information it was
necessary the intervention of the European institutions since this objective could not
“sufficiently achieved by the Member States but can rather, by reason of its effect, be
better achieved at Union level”. In fact, “the Union may adopt measures, in accordance
Fostering Entrepreneurship through CSR 891
with the principle of subsidiarity as set out in Article 5 of the Treaty on the European
Union. In accordance with the principle of proportionality as set out in that Article, this
Directive does not go beyond what is necessary in order to achieve that objective”.
What is relevant in the Directive of 22 October 2014 “amending Directive 2013/34/EU
as regards disclosure of non-financial and diversity information by certain large
undertakings and groups” are the articles 19a “Non-financial statement” and the article
29a “Consolidated non-financial statement” inserted under the Directive 2013/34/EU.
The first one states:
“1. Large undertakings which are public-interest entities exceeding on their balance sheet
dates the criterion of the average number of 500 employees during the financial year
shall include in the management report a non-financial statement containing
information to the extent necessary for an understanding of the undertaking's
development, performance, position and impact of its activity, relating to, as a minimum,
environmental, social and employee matters, respect for human rights, anti-corruption
and bribery matters, including:
(a) a brief description of the undertaking's business model;
(b) a description of the policies pursued by the undertaking in relation to those matters,
including due diligence processes implemented;
(c) the outcome of those policies;
(d) the principal risks related to those matters linked to the undertaking's operations
including, where relevant and proportionate, its business relationships, products or
services which are likely to cause adverse impacts in those areas, and how the
undertaking manages those risks;
(e) non-financial key performance indicators relevant to the particular business”.
The second one states:
“1.Public-interest entities which are parent undertakings of a large group exceeding on
its balance sheet dates, on a consolidated basis, the criterion of the average number of
500 employees during the financial year shall include in the consolidated management
report a consolidated non-financial statement containing information to the extent
necessary for an understanding of the group's development, performance, position and
impact of its activity […]”.
As already stated, it is possible to understand that the Directive is directed only to
large undertakings and groups. It, in fact, defines the scope of those non-financial
disclosure requirements by reference to the average number of employees, balance
sheet total and net turnover. “SMEs should be exempted from additional requirements,
and the obligation to disclose a non-financial statement should apply only to those
large undertakings which are public-interest entities and to those public-interest
entities which are parent undertakings of a large group, in each case, having an
average number of employees in excess of 500, in the case of a group on a consolidated
basis. This should not prevent the Member States from requiring disclosure of non-
financial information from undertakings and groups other than undertakings which
are subject to this Directive”.
892 Strategica 2016
Social entrepreneurship in the context of the Directive
In the premises of the Directive, it has already highlighted the importance of CSR,
importance that is also evident in the interest of the European Parliament which
“called on the Commission to bring forward a legislative proposal on the disclosure of
non-financial information by undertakings allowing for high flexibility of action, in
order to take account of the multidimensional nature of corporate social responsibility
(CSR) and the diversity of the CSR policies implemented by businesses”. Corporate
Social Responsibility (CSR) represents an important lever in supporting social
entrepreneurship (Austin 2007, Austin et all, 2006, Austin, et al., 2004, Austin & Reavis
2002, Austin, 2000) and in the social value creation process for both, businesses and
social purpose organizations (Crisan & Borza, 2012).
Focusing on the first aspect, social entrepreneurs have the crucial role in solving social
problems in relation to the state, having the role to endorse social entrepreneurship,
particularly in the context of large undertakings that are public-interest entities (the
recipients of the Directive). The main problem of social entrepreneurship is that the
entrepreneurs who form the CSR firms bear the cost (Baron, 2007). In particular, as
Baron (2007) says, because the market value of a CSR firm is lower than that of a
profit-maximizing firm, would an entrepreneur ever form a CSR firm?
Entrepreneurs are citizens who have an opportunity not available to all citizens. They
can establish profit maximizing firms or firms that practice CSR by redistributing a
portion of their profits to social causes.
it is, therefore, possible to divide the entrepreneur category into two large groups:
- private entrepreneur: it refers to people who create a company only if its market
value exceeds the capital required to create it;
- social entrepreneur: it refers to people who are willing to create a CSR company at a
financial loss. They sacrifice financial return but gains social satisfaction.
The social balance of social entrepreneurs may not have positive results in the short
term, but, on the contrary, the social balance prepared based on Directive could have
positive results. The social entrepreneur is, therefore, the socially responsible
entrepreneur figure towards the community; for this reason, he is accountable for the
preparation of a social balance. As has been shown (Seelos & Mair, 2004), in literature
there are many definitions of social entrepreneurship (in particular: Fowler (2000);
Hibbert, Hogg et al. (2002); The Institute for Social Entrepreneurs (2002); Canadian
Centre for Social Entrepreneurship (2001); Prabhu (1999); Dees (1998b); Brinckerhoff
(2000); Waddock & Post (1991); Thompson et al. (2000); Bornstein (1998); LaBarre &
Fishman (2001); Morse & Dudley (2002)).
It is possible to note that the definitions could be divided into three groups. In the first
one, social entrepreneurship includes the initiatives of non-profit organizations in
search of additional revenues (Dees, 1998a). In the second group, social
entrepreneurship comprehends the initiatives of independent social entrepreneurs
aiming to alleviate a particular social problem (Alvord et al., 2002). In the last one,
social entrepreneurship refers to the socially responsible practices of commercial
businesses engaged in cross-sector partnerships (Sagawa & Segal, 2000; Waddock,
1988; Wilkinson, 1992). The problem of a single definition of social entrepreneurship
derives from the difficult definition of the terms "entrepreneurship" and "social".
Fostering Entrepreneurship through CSR 893
In the present study, the definitions that best fit and best connect to the Directive are
those in the third group. The Directive requires, in fact, large companies the
preparation of a social balance in which the extent of socially responsible practices
conducted by the same would emerge. In reality, even the second set of definitions has
certain points of convergence with the Directive: in fact imposing the preparation of
non-financial statements only to public-interest entities means that these companies,
given their nature, may be responsible for alleviating a particular social problem.
European CSR is defined by the European Commission as a “Business Contribution to
Sustainable Development” and Social Intrapreneurship is a bridge between CSR and
Social Entrepreneurship. As the European Commission states, “Social businesses
combine a social, ethical or environmental mission with the entrepreneurial flair and
innovation of a business perspective”. “A social enterprise combines entrepreneurial
activity with a social purpose. Its main aim is to have a social impact, rather
than maximize profit for owners or shareholders” and Social enterprises are “Those for
who the social or societal objective of the common good is the reason for the
commercial activity, often in the form of a high level of social innovation. Those where
profits are mainly reinvested with a view to achieving this social objective. Those
where the method of organization or ownership system reflects the enterprise's
mission, using democratic or participatory principles or focusing on social justice.
There is no single legal form for social enterprises. Many operate in the form of social
cooperatives, some are registered as private companies limited by guarantee, some are
mutual, and a lot of them are no-profit-distributing organizations like provident
societies, associations, voluntary organizations, charities or foundations”.
The Commission published in November 2014 a study on social entrepreneurship,
with the aim to map the reality of social enterprise in the EU 28 (and Switzerland)
using a common definition and approach. “According to the study, social enterprises
are an important driver for inclusive growth and play a key role in tackling current
economic and environmental challenges. Yet, only eight countries have a policy
framework in place to encourage and support the development of social enterprises”.
The Directive 2014/95/UE will increase this number. In the light of what has been
said, it is possible to synthesize the social entrepreneur structure using the following
figure (Figure 1).
Figure 1. S/F-VD Model
The UE Directive has an important role in the convergence process towards corporate
social responsibility.
894 Strategica 2016
If a subject is driven only by economic and financial factors (FVD), he is a simple
entrepreneur (PE) which draws up the corporate balance in the light of international
accounting standards IAS/IFRS introduced in the European Union with the legal
instrument of the Regulations. However, if a subject is also driven by social factors
(SVD), then he could be called social entrepreneur (SE): the entrepreneur draws up a
social report next to the corporate balance. The EU Directive has a fundamental merit:
with it, some simple PE is obliged to become SE, even if they do not have a natural
inclination towards the SVD.
Not further moving into the concept of the SE, I would simply say that the Directive
allows us to talk about social entrepreneurship at a European level, a concept that in
the past (with the IAS/IFRS regulation) was present to a very limited extent.
Conclusions and implications
In this paper, I tried to analyze the status of non-financial information disclosure in the
European Union in order to evaluate the level of acceptance of social responsibility
practices. Before 2014, the situation in the UE was not very clear. Although the
European legislator had introduced the IAS/IFRS regulation for the purpose of
accounting consistency and international comparability, the same has not be done
from a social perspective. Over the years, CSR and SE concepts have gained more and
more importance, not only in domestic but also in international optical.
Companies, in fact, are not only systems for the production of value but also economic
social actors which operate in a social environment to which they belong and with
which they interact, not only through a system of monetary and financial exchanges
but also through physical, human and communication flows that produce knowledge,
trust and reputation (Gazzola & Mella, 2004).
For this reason, as previously stated (Amelio, 2015), it becomes fundamental to the
companies’ success and for a better evaluation from the stakeholders to support the
corporate balance (with the statements required by IAS 1, par. 10) with a new
document, the social balance (Wilson, 1999, Cardillo & Molina, 2011, Cavicchi et al.,
2003) in a perspective of social responsibility reporting. As evidence of the growing
attention to social responsibility themes, the UE adopted the Directive 2014/95/UE.
With this important document, the UE has forced some simple private entrepreneurs
(PE) to provide non-financial information, thus contributing to the transformation of
these subjects into social entrepreneurs (SE).
On this basis, the research can be further extended by introducing quantitative
methods in order to understand the level of adoption of the social balance by
companies subjected to the Directive, by linking them with companies that voluntarily
prepare their social balance according to par. 14 of IAS 1.
Fostering Entrepreneurship through CSR 895
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898 Strategica 2016
PUBLIC SERVICE ENTREPRENEURSHIP: THE PERSPECTIVE OF THE
ENTREPRENEURIAL OPPORTUNITIES CONCEPT
Iuliia ILIASHENKO
University of Insubria
Via Ravasi 2, Varese, Italy
juliya-ilyashenko@yandex.ua
Abstract. This paper provides a general analysis of public service entrepreneurship as a
substantial subdomain of the entrepreneurship as a science as well as entrepreneurial
opportunities that have emerged in the context of the process of liberalization in public
services industries. There are many scientific papers devoted to the experience of
liberalization process in a number of countries in different industries. Nevertheless, the
lack of conceptualization of the theoretical framework from standpoint of
entrepreneurship has been revealed. The main goal of the paper was to provide evidence
that in-depth exploration of the entrepreneurial activities in public service industries as
previous stated-owned can contribute to the comprehension of the entrepreneurship core
dimensions. In order to achieve the goal there have been three tasks to be done. First one
has been to provide clarification of the public service entrepreneurship notion, second - to
treat the practicability of its positioning as a scientific subdomain of entrepreneurship.
The third task has been to distinguish appropriate entrepreneurial dimensions of its
investigation. The discovering of the nexus between state approach to the economic
transformation and entrepreneurial opportunities that occur could provide both
theoretical and practical value in order to deepen the understanding of the nature of
internal barriers and governmental constraints inherent to public services industries as
well as its impact on the type and properties of opportunities.
Keywords: public service entrepreneurship; entrepreneurial opportunities;
liberalization; utilities; public sector.
Introduction
The phenomenon of entrepreneurship remains of current scientific interest due to the
increasing influence on the social and economic life of society on local and cross-
country levels, particularly the core concepts of opportunities are still the most
intriguing core concept of entrepreneurship. Many scientific types of research have
already dealt with the issue of identification and exploitation of entrepreneurial
opportunities and its place in the core concepts in the entrepreneurial theories.
Theoretical and empirical works devoted to the entrepreneurial opportunities, its
typology, and different models are staying of current scientific interest and typically
grounded based on the concept of alertness developed by Kirzner and prior knowledge
and asymmetric information proposed by Hayek’s and developed by Shane, Eckhardt,
and Venkataraman.
Meanwhile, the exploitation of the entrepreneurial opportunities, which comes from
the liberalization of the regular economy, is remaining one of the most significant
spheres of research. Special cases when an industry, passing through the
Fostering Entrepreneurship through CSR 899
transformation period, provides public goods and has significant social meaning (for
instance, utilities) is are of particular interest as well. Simultaneously, investigation of
public sector entrepreneurship is becoming the subject of precise scientific interest
over the last 20 years. Nonetheless, it is considered primarily through the lens of
privatization and partially through start-ups, i.e. central focus lies on the firm
formation and partially on the innovative component.
However, according to Shane a new firm formation is “merely one institutional
arrangement for the identification, evaluation, and exploitation of opportunities”,
inasmuch as the same results can be reached by individuals within “existing firms or
through market mechanisms” (Shane, 2003). Nevertheless, other dimensions typically
are less considered. For instance, Pittz and White (2016) presented paper considers
“public-private partnerships (PPPs) as exemplars of enduring entrepreneurship …
Many PPPs exhibit continual renewal and repeated acts of entrepreneurship as they
explore novel solutions to intractable social problems…” (Pittz & White, 2016).
Nevertheless, considering PPPs from the standpoint of Schumpeterian institutional
innovations, issues devoted to the opportunities identification are omitted. This state
of affairs has led to the fact that to date, the most of the studies related to exploration
of opportunities, which comes from the economic transformation processes, have
concentrated in the literature of public administration. This paper provides arguments
that public service entrepreneurship phenomenon remains undisclosed, being in its
turn highly relevant to the subjects of entrepreneurial theories treatment.
The main goal of the paper is to provide evidence that in-depth exploration of the
public service entrepreneurship as a substantial scientific subdomain of
entrepreneurship can contribute to the comprehension of its core dimensions. In
particular, treatment of the public service entrepreneurship from the standpoint of
opportunity concept could provide interesting patterns that will shed the light on the
issues of the nature of entrepreneurial opportunities.
Recent research of Ramoglou and Tsang (2016) promotes a realistic perspective on the
entrepreneurship, observing opportunities as propensities considering the key issues
of the entrepreneurial theories. Current achievements prove the scientific interest
increasing to deep existing theories with new approaches as well as the fact that
interest to the opportunities exploration process remains at high level. One of the main
issues of entrepreneurship as a field of research is the discussion about the subjective
or objective nature of entrepreneurial opportunities. Paper presented by Ramoglou
and Tsang (2016) promotes the approach, which defines opportunities “… as
unactualized propensities - as an alternative that maintains a commitment to the
objectivity of opportunities but does not have the shortcomings plaguing the discovery
perspective…”. These theoretical achievements consequently have raised a new wave
of discussion concerning entrepreneurial opportunities theorization, typology,
properties, and the role of prior knowledge in its discovery as well. Thus, it can be
considered of great importance to work out the conceptual framework for the
entrepreneurship in the fields that provides public and social goods and are under the
process of liberalization.
As well, the paper seeks to explain why it is reasonable studying the public service
entrepreneurship to shift the attention away from the comprehension of the nexus
individuals acting as entrepreneurs and entrepreneurial opportunities exploitation
900 Strategica 2016
(highlighted by Erhard and Shane (2003) towards the revealing of the nexus between
state approach to economic transformation and opportunities exploration.
The notes are going to proceed by following steps. First step – to treat the origin of
notion of public sector entrepreneurship and to describe the attributes that
differentiate public service entrepreneurship; second – to provide brief literature
overview to define the place of public service entrepreneurship among particular
scientific domains; third – to distinguish the dimensions of entrepreneurship as a field
of research treatment of which public service entrepreneurship subdomain in order to
contribute the theory of entrepreneurship.
“Public service entrepreneurship” – the origin of the concept
For the purpose of the paper in determining of the public service entrepreneurship
notion, it was decided to adhere to the Baron’s definition of entrepreneurial
opportunities as “perceived means of generating economic value (i.e., profit) that have
not previously been exploited, and are not currently being exploited by others”. On the
other hand, Matthews’ (2014) definition of the process of entrepreneurially acting in
public sector as a pattern of specific behavior of identifying precise commercial
opportunity and internal barriers as well as willing to exploit them taking into
consideration “the operational and governance constraints imposed by the respective
public sector agency itself” (Matthews, 2014) highlights the main peculiarities of
entrepreneurship in public sector. Thus, firstly before to consider the meaning of
public service entrepreneurship it is reasonable to discover closely related notion of
public sector entrepreneurship. In various studies, this notion was implicated
relatively recently. For instance, Tosterud et al. (1999) considered the public sector
entrepreneurship as transference of the private sector entrepreneurial organizational
tools at public sector enterprises in order to improve its efficiency. According to
Leyden et al. (2015) public sector entrepreneurship has been defined as “the
promulgation of innovative public policy initiatives that generate greater economic
prosperity by transforming a status quo economic environment into one that is more
conductive to economic units engaging in creative activities in the face of uncertainty”
(Leyden & Link, 2015). Nevertheless, the patterns considered by the authors include
revealing the impact of state acts on the public sector entrepreneurship on the
example of small businesses and nonprofit organizations in particular universities and
federal government laboratories which actively promote technology transfer to the
private sector as commercialization of its exploitation as a “quintessential examples of
the public sector recognizing and exploiting opportunities to bring about change and
efficiency”. However, if we accept the description of national economies as the
composition of “three major sectors: the private sector, the social or non-profit sector,
and the public or government sector” (provided by Tosterud, 1999) it is becoming
obvious that there is still some tangle of public service entrepreneurship perception
between different scientist. The case of Leyden’s mixing example of the treatment of
public sector entrepreneurship through the consideration of nonprofit organizations is
quite illustrative.
At this stage, it is reasonable to switch attention to the notion of public service
entrepreneurship. Initially, it was applied at the beginning of XX century in the sphere
of health and social care services in order to treat the peculiarities of mutual ventures
Fostering Entrepreneurship through CSR 901
foundation. In addition, up to now, it is often applied exactly at that meaning. In return,
Drucker (2009) in his note called “Innovation and Entrepreneurship in Public Service
Organizations” includes to the public service organization education, health, and
community service as well as stresses one the main attributes of the last one: the focus
on enterprises first on “doing good”.
“The effectiveness of the public service organization may thus be measured by its
increasing budget and increasing services or activities, or by its efficiency, providing more
services at a lesser cost… While innovation and entrepreneurship may be more of a
challenge in institutions of higher education and other public service organizations, it
can be done. If opportunities are not addressed internally, someone else will address them
externally, and the organization will eventually become obsolete.” (Drucker, 2009).
Based on statements mention above this paper seeks to provide clarification of the
nexus between notions of the public sector and public service entrepreneurship. As it
was revealed the majority of studies have examined health care, education institutes
and public-private technology’s transfers’ from the standpoint of public
entrepreneurship concept thus creating a huge gap in the entrepreneurial scientific
literature. The treatment of public service entrepreneurship should include
investigation of utility enterprises (i.e. water supply and sewage, heating, electricity,
transport enterprises, etc.) as the source of contributions to the theories of
entrepreneurship. These enterprises are a substantial part of national economies and
provide services of great social meaning supporting all sphere of economic life as well.
Instead of this, all scientific experience concerning this issue is tied up in literature
devoted to the liberalization processes consideration. The exploration of public sector
entrepreneurship including the sphere of health care, education, etc. should include
investigation of public service entrepreneurship with a focus on the entrepreneurial
activity of “utilities” as a separate scientific subdomain of entrepreneurship.
From this perspective in order to provide clarification, the entrepreneurial
opportunities in public sector are defined as perceived means of generating economic
value (i.e., profit) in order to support performing of social functions (i.e. formation of
social value of particular quality level) in such a way that has not previously been
exploited, and are not currently being exploited.
Public service entrepreneurship in its turn is a process of recognition of these
opportunities in previously state-owned industries which provides public services and
its further exploitation with respect to internal barriers and operational and
governance constraints inherent in the public sector. The main goal of public services
entrepreneurship study is to provide a general analysis of opportunities that have
been emerged in the process of liberalization in public services industries as a specific
kind of opportunities with the particular properties and the peculiar process of its
exploration.
From this standpoint, it is reasonable to consider entrepreneurial opportunities in two
main dimensions:
- to treat the entrepreneurial opportunities in public services entrepreneurship as
specific kind of opportunities in the frame of classical dimensions of entrepreneurship;
- to analyze the process of recognition and exploitation of the entrepreneurial
opportunities in public services entrepreneurship as ones which appear under the
902 Strategica 2016
transformational processes in the national economy (i.e. liberalization, institutional
changes, etc.).
Public service entrepreneurship as scientific subdomain of entrepreneurship
In order to identify the current positioning of public service entrepreneurship among
existing theories and studies paper provides a brief overview of literature sources that
considers this phenomenon from a different standpoint. As it has been mentioned
before, one of the main lenses of its consideration is case studying of privatization and
public-private partnership. Consequently, the vast majority of publications were
concentrated in public management journals, such as International Public Management
Journal, Public Management Review and Journal of Policy Analysis and Management,
etc. The key point of these publications is application of management techniques
inherent for private companies in the public sphere which generated the stream in
management literature called “new public management” - Eckerd (2016), Brown
(2011), Heijden (2016), Verhoest (2014), Grimmelikhuijsen (2016), Wynen (2013),
etc. The second source is reports of national and international associations, which aim
is to investigate the consequences of economic transformation in countries. These
publications cover issues connected to the processes of “demunicipalisation” and
“demonopolisation” in public sector (for instance, Report of American Society for
Public Administration (Pichla, 2014), Research Unit EU Integration, Public Services
International Research Unit). The main feature of these reports is the absence of
causality investigation. Another source of publications is management review journals.
These publications are of significant importance as includes attempts to provide the
“entrepreneurial point of view” to the issue of the public service entrepreneurship. For
instance, Klein (2010) considering interrelation between public entrepreneurship and
private entrepreneurial behavior, highlighted that public and private entrepreneurship
critically differs by “the definition and measurement of objectives and the
opportunities for rent-seeking” (Klein, 2010).
The achievements of specific interest were presented in the paper of Shaker and Zahra
(2000) published in The Academy of Management Review by promoting a model of
linking the privatization to a company’s entrepreneurial activities. The authors
highlighted the lack of investigation of the influence of privatization on firms’ ability
“to innovate and engage in entrepreneurial activities”, which could be considered as an
indirect examination of the how liberalization effect on entrepreneurship development
(Shaker & Zahra, 2000). Andrew Spicer et al. (2000) explore the nexus of privatization
policies and effectiveness releasing entrepreneurial endeavors in transition economies
through the lens of the speed of poverty reform. The main achievement of this study
was the demonstration on the example of several countries (in particular, Hungary,
Check Republic and Poland) that approach which state choose has a direct influence on
the entrepreneurial enabling environment creation and consequently leads to the
different kind of opportunities emerges in the similar conditions of economy
transformation.
The overview of Gale Academic OneFile database revealed that the peculiarity of these
publications is that further traces of citations showed that 65% of it leads to the
publications in strategic journals (i.e. Journal of Strategic Innovation and Sustainability,
Strategic Organization, etc.), 10% accounted for Corporate Governance Journals, such
Fostering Entrepreneurship through CSR 903
as Industrial and Corporate Change, Corporate Governance An international overview,
etc., another almost 10% goes to Policy Journal, for instance Journal of Health Politics,
Policy and Law, as well little bit more that 10% of paper are published in management
journals, such as Academy of Management Review, and the rest devoted to the
different studies, the most relative to the topic among them is Urban Studies journals.
It illustrates the lack of systematic approach to the issue under consideration causes
the further analysis does not deepen previous achievements, instead of this it deviates
into the different stream of studies with the different objectives and applications.
Finally, the last place by the number of related to the theme publications represented
by the journals of entrepreneurship and business journals. Nevertheless, these
publications are of great importance with respect to disclosure of public service
entrepreneurship phenomenon. For instance, indirect consideration of the
opportunities recognition process is observed in the recent investigation devoted to
the peculiarities of searching the information on public sector tender opportunities of
small and medium-sized enterprises taking into consideration firm’s innovative
orientation (Reijonen et al., 2016). Morris (1999) paid precise attention to the
characteristics of the environment in which public sector enterprises operate and the
increasing meaning of entrepreneurship within this operation from the standpoint of
contingency theory. The peculiarities of introduction the quasi-markets in public
sector, which can be provided only through the application of entrepreneurial activity
is considered by Boyett (1996). The literature overview showed that at 90-ies of XX
century the issue of public service entrepreneurship was considered primarily in
entrepreneurial journals but then there was a shift of scientific attention to the
direction of public administration research which prove statement concerning the gap
in the consideration of entrepreneurial activity in public service industries from the
point of entrepreneurship and the concept of opportunity in particular.
If consider the second task stated in the first part of the paper it is necessary to study
the literature which deals particularly with processes of economic transformation in
public service industries. There is a lot of liberalization experience in this field,
organizing special forms of entrepreneurship (for example, the experience of Italy to
organize mixed water supply enterprises (Marra, 2006). Nevertheless, there is a lack of
research concerning the generalization of this problem that could provide enterprises
with a theoretical base with respect to the issue of how to make this process less
painful for the industries that have a great social meaning. One of the interesting
researches on this issue was provided by Roeder (1998). It stated that instead of
liberalization in these countries one integrated command economy is replaced by
many smaller mercantilist economies with strong patronage-based welfare policies.
Thus, there are many peculiarities of the post-soviet countries liberalization process.
Nevertheless, not enough attention has been paid to the consideration of liberalization
as an economic transformation that acts as a specific source of entrepreneurial
opportunities from the standpoint of core concepts of entrepreneurial theories.
In addition, it was revealed the lack of scientific literature that considers the
peculiarities of market development in the industry with respect to its role as the
environment in the process of entrepreneurial opportunities exploration. For that
matter, there is the essential definition of public service industries as initially state-
controlled sector of the economy under deregulation processes. In such a way it is
developed enabling an environment for privatization processes and “because of an
904 Strategica 2016
active free market in other sectors, there are many successful examples of the newly
deregulated firms to follow” (Shaker & Zahra, 2000). The last statement highlighted
the necessity of rigorous treatment economic transformation processes in public
service industries as the peculiar environment of entrepreneurial opportunity
exploration and exploitation. The empirical outlook with this respect is presented
through the analysis of the city development strategies from the standpoint of
identification of urban entrepreneurship objects (for instance, Hong Kong case (Jessop
et al., 2000).
Thus, conceptualization of public service entrepreneurship through the treatment
from the opportunistic concept in entrepreneurship with respect to the disclosure of
the state approach and opportunities-emergence nexus has a potential as a subdomain
of entrepreneurship as a science to deepen comprehension of its key dimension.
Public service entrepreneurship through the lens of entrepreneurial dimensions
In general, the investigation of entrepreneurial opportunities exploration under the
liberalization process in public services industries should be considered trough all four
dimensions of entrepreneurship as a field of research, highlighted by Shane.
Nevertheless, this paper is focusing mainly on two of them: the discussion of the nexus
of opportunities and individuals and the discussion of means-ends relationships,
innovation, and new combinations are supposed to be the dimensions mention above.
The state approach – entrepreneurial opportunities vs. individuals-opportunity
nexus
The paper argues that from the perspective of potential contribution to the theory of
entrepreneurship it is reasonable to shift attention away from the treatment of the
nexus between individuals and the process of opportunities recognition and
exploitation towards the investigation of the nexus between state approach to
economic transformation and types of entrepreneurial opportunities emergence. In the
case of concentration on the individual-opportunity nexus, the great level of social
responsibility is one of the main features of public service entrepreneur. Thereby
under consideration of this nexus, the main focus will be on the perspective of personal
characteristics of entrepreneurs as individuals, willing to bear the social responsibility
and to overcome internal operational and governmental barriers in the exploitation of
the opportunities. It could be considered as a step back to the concentration on the
entrepreneur personality. Contrariwise, exploration of entrepreneurial opportunities
sensitivity to the state approaches can provide researchers with necessary information
of the nature of these barriers and its impact on the type and properties of
opportunities, for instance, life cycle etc. The following brief case study of Berlin water
supply enterprise liberalization will seek to provide illustrative evidence to this
statement. Currently, this case is treated as for example of the liberalization failure and
management is gradually returning to the public governance. Prior to the partial
privatization Berlin Waterworks (Berliner Wasserbetriebe, BWB) was a substantial
institution for 3.7 million people, and produced million euro profits annually as
revenue into Berlin’s budget (Werle, 2004). The general reason for the privatization
was an expansion of the large multi-utility groups, who are always on the outlook for
new investments possibilities, as well as in the neo-liberally fashioned ideology of the
global economy (Werle, 2004). However, analyzing this case in terms of
Fostering Entrepreneurship through CSR 905
entrepreneurship conceptual cause of this failure could be determined as the absence
of nature precondition for the entrepreneurial opportunities emergence. There was no
disequilibrium between the perception of value or price. As well as we take into
consideration possibility of particular disequilibrium inherent for public service,
specifically price-quality disequilibrium, which is one of the most important attributes
of public service entrepreneurship development. Anyway, it was not a case of Berlin as
well as there were no any managerial crises. Therefore, this entrepreneurial
opportunity was artificially generated and proved to be unsustainable. However, in the
most cases, scientific literature-inclined to call privatization as an antecedent of
entrepreneurial opportunities emergence, careful treatment of such cases from the
standpoint of entrepreneurship will have both theoretical and practical implication.
Another important source of scientific interest under the subject of consideration lies
in the treating of local entrepreneurship phenomenon. As a result of the high
sensitivity of entrepreneurial opportunities exploration in public services
entrepreneurship to the inherent approach of the state and municipal authorities to
the transformational processes the protraction of the transitional stage to the
opportunities, exploration is observed. Consequently, appears alternatively units of
opportunities exploration and exploitation which starting to act as entrepreneurs
without waiting for a response from the city authorities.
The phenomenon addresses to the discovery theory acting as a support for the
objective existence of entrepreneurial opportunities appealing to the issue of prior
knowledge concerning customer needs. One of the first forms of local public service
entrepreneurship across European countries (Poland, Check Republic, Ukraine, etc.)
are small and medium private firms that deal with general household chores. The
appearance of such phenomenon is a result of situations when customers are not
satisfied with a quality of public services (Ukrainian case: water supply industry) or
they have no access to it (South Africa case: water supply industry). Local public
services entrepreneurship is represented by initiatives of individuals who managed
with this problem in an alternative way, acting as entrepreneurs. Thus, different
opportunities with different properties are promoted under transformational
processes in public service industries. Exploitation opportunities under local
entrepreneurship are less sensitive to the municipal authority regulations, have a
higher level of freedom with faster reaction to the market requests, but are less
innovative by its meaning, with a comparison to entrepreneurship initiated by
municipals regulations.
“Public well-being” concept vs. “for profit” entrepreneurial opportunities
The second dimension mentioned above that should be addressed is an issue of such
necessary property of entrepreneurial opportunities as profitability. According to
Shane et al. efforts to pursue opportunities “for profit” within existing means-ends
frameworks, such as arbitrage, do not involve entrepreneurship because
entrepreneurship is limited to efforts to pursue profit opportunities by recombining
resources (Shane, 2010). Consideration of entrepreneurial opportunities, which
appears under the liberalization in public service industry in terms of profitability of
opportunities, allows treating this issue from the standpoint of “arbitrage” concept that
in this particular case more accurately to define as “public well-being” component. The
general goal of effective functioning of public services enterprises is increasing the
906 Strategica 2016
quality of citizens’ life and maintaining other industries with particular resources.
Therefore pursuing opportunities promoting the development of public service
entrepreneurship cannot be limited to the pursuing opportunities for profit, but for
social value as well (if not primarily) whilst Baumol (1990) in his work insists on the
primacy of profit-seeking activities. According to Lee and Venkataraman (2006), the
opportunity of social value creation should not be considered as entrepreneurial
opportunity” (Lee & Venkataraman, 2006). In this aspect, the interrelation between
goals and its side effects represented trough the combination of social
entrepreneurship and profit gaining as a reflection of the altruistic component in
entrepreneurship (Austin et al., 2006) is of particular value for the exploration of
inherent characteristics of entrepreneurial opportunities exploitation in public sector.
Nevertheless, in the case of public service entrepreneurship, the profit-social effects
combination is observed, representing in its turn another challenging issue to be
addressed in a study.
Conclusion
Public service entrepreneurship as a substantive part of public sector
entrepreneurship still remains undisclosed and underestimated from the
entrepreneurship theory perspective. The majority of public entrepreneurship studies
are focused primarily on the consideration of the application of the tools of private
sector management to the public sector organization, such as health and social care or
education, treatment of utilities in this aspect is undeservedly omitted.
Herein the paper’s goal has been to provide further progress toward understanding of
the properties of entrepreneurial opportunities, which emerges during process of
economic transformation in the industries which provides public services, in particular
utilities, as well as internal barriers and inherent governmental constraints impact on
its exploitation in order to advance the state of knowledge about the concept of
opportunities.
The catchall conclusion is that the identification of the public services
entrepreneurship as a subdomain of entrepreneurship as a science is able to facilitate
its several core concerns and suchwise to contribute the theory of entrepreneurship.
The discovering of the nexus between state approach to the economic transformation
and entrepreneurial opportunities that occur under these processes could be helpful
for the countries that are still under the liberalization to make it more effective and
less painful for public services industries, providing emergence of the persistent
entrepreneurial opportunities.
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Fostering Entrepreneurship through CSR 909
BUILDING SUSTAINABLE HEALTHCARE ORGANIZATIONS
Mauro ROMANELLI
University of Naples Parthenope
via G. Parisi, 13, 80132, Napoli, Italy
mauro.romanelli@uniparthenope.it
Abstract. Healthcare organizations have to proceed towards a sustainable development
by seeking legitimacy for building and maintaining public trust with patients as social
and economic institutions creating value and wealth for society. Sustainability of health
care relies on rediscovering the importance of human resource management and policies
for effectively improving communication with patients and building trust-based
relationships. While processes of accreditation tend to be regarded as a means for
legitimizing quality and efficient processes, the introduction of new technology seems to
be more focused on restoring the relationship with patients.
Keywords: sustainable health care; accreditation; technology; human resource
management and policies.
Introduction
The aim of this study is to identify the drivers leading the healthcare organizations and
systems to proceed towards a sustainable, social and economic development. The
future of healthcare systems relies on redesigning the relationship with citizens and
patients based on dialogue and cooperation. The future challenges healthcare systems
will have to face require to combine and link processes of accreditation, new
technologies, and human resources in order to permit to healthcare organizations to
build efficient and effective processes that improve medical and health issues for
building and maintaining better public trust with patients and citizens. Human
resource management (HRM) practices tend to represent a fundamental issue of
analysis and development in health care sector. Sustainability of healthcare systems
relies on healthcare organizations seeking legitimacy for building and maintaining
trust with patients. Healthcare organizations tend to achieve legitimacy and need of a
social appraisal. Trust as a multidimensional concept is an important component of the
relationship between clinicians, healthcare institutions, and patients. Healthcare
organizations tend to invest in public trust as a resource for building new relationships
with patients (Mechanic, 1998).
The study is articulated in four paragraphs. The theoretical framework is presented in
the first paragraph. In the following paragraphs, the three pillars or drivers for health
care sustainability are presented. Processes of accreditation are considered as a means
of improving the quality of healthcare services. The adoption of new technologies
offers healthcare organizations the opportunity for developing an interactive
communication with the patient. Thereby, managing processes of accreditation and the
adoption of new technologies rely on designing and implementing strategically human
resource management systems and policies towards a sustainable development in
long-terms. Finally, in the last paragraph, the discussion and conclusions are presented
910 Strategica 2016
jointly with future research perspectives. The study relies on archival and qualitative
data drawn by analysis and review of the literature concerning the relationship
between healthcare organizations and new technologies, processes of accreditation
and the relevance of managing human resources.
Towards sustainable healthcare organizations seeking legitimacy for building
trust
The main challenge of healthcare systems and organization is to proceed towards a
sustainable development in long-term. Healthcare systems should contribute to
improving public health and ensure both well-being and wealth of society in order to
generate positive benefits and contribute to broader social value (Gilson, 2003). Health
systems need to improve the quality and outcomes of care. Ferlie and Shortell (2001)
have proposed a multilevel approach for building and sustaining change focused on
different levels: the individual, the group or team, the organization, and the larger
system in which organizations operate and are embedded by recognizing the
importance of some essential core properties for managing a successful quality-
improvement work: the role of leadership and the development of effective teams; the
relevance of culture in sustaining learning in the care process; the adoption of
information and communication technologies (ICTs). Healthcare systems facing the
challenges related to the development and aging of population, the average life
expectancy, the advances in medicine, in technologies, human-computer interaction
and informatics (Haux, Ammenwerth, Herzog & Knaup, 2002) should develop a long-
term and organizational ability to mobilize human, financial and technological
resources for activities meeting needs and demands of public health or the individuals
(Olsen, 1998) coherently with interventions on individual, organizational, community
action and system level to achieve health promotion outcomes (Sverissen & Crisp,
1998). The healthcare system tends to be embedded in larger societal, industrial and
political systems that influence the pace and spread of innovation driving healthcare
organizations to be viewed as complex systems acting in ways not always linear and
predictable (Plsek, 2003).
Sustainability of health care tends to rely on seeking legitimacy for building trust with
citizens and patients. The challenge of sustainability relies on the ethical task of
fulfilling institutional responsibilities related to patients, physicians and other health
professionals defining the obligations of health institutions for building patient-
centered organizations ethically responsible (Gallagher & Goodstein, 2002; Gray,
1997). Organizations tend to achieve greater legitimacy conforming to the
expectations of the key stakeholders in their environment by enhancing the credibility
of their actions and pursuing active or passive support and obtain resources in order
to survive. Legitimacy can be considered as a central concept in the organizational
study coherently with an institutional perspective (Deephouse & Suchman, 2008).
Legitimacy as a cognitive process through which an entity becomes embedded in
taken-for-granted assumptions implies that the actions of an entity are desirable, or
appropriate within some socially constructed system of norms, values, beliefs, and
definitions.
Legitimacy can be embedded in organizations as constitutive belief or be managed so
that the organizational goals can be achieved (Suchmann, 1995). Healthcare
Fostering Entrepreneurship through CSR 911
organizations need to gain, enhance and maintain legitimacy facing complex challenges
and highly institutionalized environments under conditions of uncertainty (Powell &
DiMaggio, 1983; Yang, Fang & Huang, 2007; Meyer & Rowan, 1977) working actively to
influence and manipulate the normative assessments and feedback they receive from
their multiple audiences (Ruef & Scott, 1998). Health organizations consider trust as a
necessary investment for building a new partnership and collaboration with patients
(Mechanic, 1998). Trust as a multidimensional concept is an important component of
the relationship between clinicians, healthcare institutions, and patients. Trust is
generally associated with a high quality of communication and interaction driving
patients to reveal information and work cooperatively with doctors (Mechanic, 1996).
Promoting quality of healthcare services: the role of accreditation processes
Today, promoting excellence and quality in healthcare services seems to be the main
challenge for healthcare organizations ensuring actual and future benefits for citizens
and patients. Healthcare organizations as moral agents are challenged to take
responsibility for the processes leading to desired outcome (Gallagher & Goodstein,
2002). The accreditation programs tend to be an important driver to improve quality
and safety in healthcare organizations (Greenfield & Braithwaite, 2008). Accreditation
as a periodic external evaluation of a healthcare organization, by recognized experts,
should provide data and information about the evidence of the quality of care,
treatments, and services delivered to the individuals. Accreditation procedures first
require to the organization a detailed self-review of the safety of the care delivery
processes, to grant after a visible demonstration to stakeholders (patients, their
families, staff and community) of organization’s ongoing commitment to safe and high-
quality care, treatments, and services. Accreditation could be seen as a source of
economic gain and legitimacy for healthcare organizations that are permitted to
operate by receiving an accreditation award as form and source of legitimacy in front
of the stakeholders and patients (Jaafaripooyan, Agrizzi & Akbari-Haghighi, 2011). The
growth of healthcare accreditation programs accelerated globally in the 1980s and in
Europe in the 1990s to improve the quality of health care. The earliest programs were
based on the North American models of the JCAHO and the Canadian Council on
Hospital Accreditation. In the last decade within industrialized countries, processes of
accreditation were designed and implemented in order to promote and ensure a
quality system with regard to different stakeholders as clients, healthcare providers
and public administration. The organizational accreditation model provides a
framework for the convergence and integration of the strengths of all the models into a
common healthcare quality evaluation model (Donhaue & vanOstenberg, 2000).
Accreditation can be considered as a rigorous external evaluation process that
comprises self-assessment against a given set of standards, an on-site survey followed
by a report with or without recommendations, and the award or refusal of
accreditation status. Accreditation as a process intended to improve quality and safety
coherently with international standards consists of a formal declaration by a
designated authority that an organization has met predetermined standards. The
accreditation process is an effective leitmotiv for the introduction of change coherently
with a learning cycle and curve. Institutions tend to invest greatly to conform to the
first accreditation visit and reap the benefits in the next three accreditation cycles but
find accreditation less challenging over time (Pomey et al., 2010). Health service
912 Strategica 2016
accreditation programs as evaluation processes aim to improve the quality and safety
of patient care, permit to assess the performance of healthcare organizations by
investigating their compliance with a series of pre-defined, explicitly written standards
for encouraging continuous improvements of quality. Accreditation is carried out by
independent and external professionals focusing on functioning and practices of
healthcare organization in order to ensure that conditions regarding the safety, quality
of care and treatment of patients are taken into account leading to sustainable
improvements in patient care quality and safety (Jaafaripooyan, Agrizzi & Akbari-
Haghighi, 2011). The accreditation programs play a key role in monitoring the
reflection of quality and excellence as healthcare values with its respective impact at
the societal level as an influential mechanism for protecting society by guaranteeing
the access to quality and safe health care.
The use of accreditation makes government more responsive in front of the public and
permits to citizens’ perspective to be heard in setting policy and standards for
accreditation, meeting the increasing demand for public accountability of healthcare
providers, as to contribute to decrease healthcare costs (Schyve, 2000).
Rediscovering the importance of human resource management and policies
within healthcare field and organizations
Human resources are driving health system performance. Managing performance in
health care relies on connecting human resources actions (numeric adequacy,
remuneration, work environment, system of support, appropriate skills, training and
learning, leadership and entrepreneurship) and workforce objectives (commitment,
motivation and support, competence, training and learning) to ensure health system
performance in terms of equitable access, efficiency and effectiveness, quality and
responsiveness like indicators leading to health outcomes or health of the population
(Chen et al., 2004). Thereby, some obstacles tend to emerge with regard to the best
employment of health workforce: lack of strategies sustaining, motivating and training
health workers; no coherent distribution of health workers in territories; skill
imbalances; weak knowledge base on the health workforce. Strengthening sustainable
health systems relies on investments in human resources, appropriate education,
deployment and retention of human resources, putting workers first developing the
workforce by building cooperation and collaboration across health workers, health
sectors and government (Chen et al., 2004). Health policies facilitate planning, support
decision-making, provide a framework for evaluating performance, and help to unify
different resources and personnel for building consensus about health issues and
allowing citizens express opinions for promoting legitimized actions. Health policies
should be developed for specifying health objectives and priorities, identifying means
and resources to achieve goals, rationalizing decision-making, defining the frame of
reference for reporting and evaluation, building support and consensus, building
cooperation between professionals and other stakeholders about health issues.
Developing explicit HRH policies permits to promote a more comprehensive and
systematic approach to HRM for health organizations called to arrange appropriate
adjustments to the workforce facing external pressures (Dussault & Dubois, 2003).
The need for better managing a highly motivated and skilled professional workforce in
health care is an emerging and actual challenge for managing healthcare systems
Fostering Entrepreneurship through CSR 913
proceeding towards sustainability by improving healthcare quality service,
performance, and patient outcome. Strategic human resource management seems to
contribute to improving organizational performance and outcomes (Stanton & Leggat,
2007). Human resource functions should consistently influence employee and
management behavior enabling the organizational strategies (Boxall & Purcell, 2003).
HRM practices as an important driver for success and innovation contribute to
building a supportive environment of cooperation by promoting the development of
human and social capital. HRM practices should be considered and interpreted as
behavioral patterns for sustaining human resources capabilities (Karoche, 1996).
Human resource management for health care tends to be characterized by a limited
vision of managing human resources related to merely personnel administration;
dispersal of accountability and lack of coordinated actions; reactive attitudes in the
management of the health workforce; subordination of health human resources to
economic criteria; a short-term view of human resource management. Human
resources are often neglected as a component of health development. Seven
characteristics are identified to achieve benefits through people: an emphasis on
providing employment security; the use of self-managed teams: decentralization of
decision-making and extensive training; selective hiring of new personnel; reduced
status distinctions and barriers; extensive provision of training; compensation linked
to performance. Health organizations more and more tend to cope with enhancing
performance through human resource management practices, systems and policies.
People tend to make a difference for achieving better results in terms of social,
financial and economic performance within organizations. Organizational capabilities
and value creation tend not to exist without people management. Defining the best
practices of human resource management in health care is not enough for translating
intervention and policies in the context of healthcare organizations (Buchan, 2004).
Within healthcare field, human resources contribute to improving the quality of
services and patients’ satisfaction. Effective human resource management strategies
are required to achieve better outcomes in health care. Focus on human resources is
necessary to develop new health policies sustaining training levels and education of
the workforce. Thereby, some obstacles emerge for professionals seeking to deliver
high-quality services: lack of congruence between different stakeholders’ values,
absenteeism, turnover, low morale of health personnel. Human resource initiatives
contribute to improving an organizational culture exerting a positive influence on the
effectiveness of care leading health professionals to be actively involved at high levels
of strategic planning having an understanding of all areas of the organization (Kabene,
Orchard, Howard, Soriano & Leduc, 2006). Health organizations tend to enhance
performance by designing human resource practices, policies, and systems that tend to
influence employee attitudes and behaviors with regard to reciprocal expectations
between organization and employee (Harris, Cortvriend & Hyde, 2007). Organizations
investing in policies for human resources tend to design clear roles and goals for their
employees having relatively higher levels of knowledge and skill by an emphasis on
training and performance management, being able and willing to share and utilize
their tacit knowledge as a result of decentralization of decision-making and higher
levels of involvement (West, Guthrie, Dawson, Borrill & Carter, 2006). The
organizational context tends to differentiate and specify the features of the health
sector with regard to human resource management because many of the measures of
organizational performance tend to be unique too (Buchan, 2004). For example, some
914 Strategica 2016
studies have shown that the increasing autonomy for healthcare organizations helps
for tailoring human resources systems and practices as more appropriated to a specific
context (Harris, Cortvriend & Hyde, 2007).
The role of technology in connecting healthcare organizations and patients
The introduction of new technologies of medical informatics to healthcare sector
should contribute to improving the operational and economic efficiency of healthcare
service delivery going beyond obtaining merely financial results by cutting
expenditures and cost. According to the eHealth Action Plan 2012-2020 – Innovative
healthcare for the 21st century the eHealth is related to using information and
communication technologies applied to health products, services, and processes
combined with organizational change in healthcare systems and new skills for
improving health of citizens, efficiency and productivity in healthcare fostering
communication, interaction, data and information exchange between health
institutions, providers and patients. The Internet tends to appear as a chance and
challenge for evidence-based patient choice allowing patients to access general
information and facilitate access to diagnosis, personal risk factors, and prescribed
medicines enabling personalization of information. The Internet and social
technologies permit to reconfigure and redesign the relationship between healthcare
institutions and patients leading the citizen to assume a responsive orientation about
their healthcare driving the health care from institution-centric to patient-centric or
consumer-centric systems in which patient can actively behave and act about their
own health (Eysenbach & Diepgen, 2001).
E-health, as tailored to be considered as interactive, interoperable and personally
engaging, contributes to making difference enhancing the quality of health care and
promotion. The most part of definitions about e-health care seems to relate to health
care as a process to be improved rather than the outcome to be achieved. The role of
technology is mainly to contribute to enabling processes, functions and services as to
support human activities rather than merely represent a substitute (Oh, Rizo, Enkin &
Jadad, 2005). E-health care is related to technical development bridging medical
informatics, public health and business to deliver or enhance health services and
information through the Internet and technologies. E-health seems to relate to both a
state of mind and commitment to building a networked global thinking for health care
improvement driven and supported by technology. E-health seems to refer to the
introduction and implementation of technology in health care as an enabler of social
and technical innovation and process that implies issues on side of technical, economic,
individual and community level. New technologies contribute to provide efficiency and
quality evidence-based, empower and educate both the consumer and the patient
making accessible personal records and knowledge to be acquired, redefining new
relationships between patients and health professionals, by encouraging information
exchange and trust between them, involving communities beyond geographical
boundaries that emphasize the search and need of new standards of equity and ethics
in front of the emerging challenges and risks that potential benefits of introducing
technologies tend to deliver (Eysenbach, 2001).
Fostering Entrepreneurship through CSR 915
Conclusions
Healthcare institutions as complex organizations in virtue of the professional nature of
work have to pay more attention to human resource management for influencing
organizational performance and ensuring desirable outcomes by promoting quality of
care and patients’ satisfaction. Human resources tend to assume a critical role in
determining the success of private and public organizations. Tailoring appropriate
human resource management practices to the specificity of each healthcare
organization should lead to high quality of healthcare services in order to improve the
patients’ satisfaction and health outcome. Processes of accreditation should drive
policy makers and healthcare organizations to design specific practices of personnel
assessment paying attention on human resources development and commitment by
reinforcing the identification and esprit of belonging to the organization. Technology
redesigning the relationship between health institutions and patients is leading
healthcare organizations to consider the patient more and more aware of own health
situation as co-producer of health service delivery and to design human resources
systems and practices that emphasize and incentive soft skills and emotional
intelligence of doctors and physicians.
The contribution of this study is to propose a framework of analysis for leading
healthcare organizations to proceed positively with regard to social, economic and
financial outcome based on a triangle for sustainability by linking human resource
management practices and systems, the use and implementation of new technologies
in healthcare services for better managing processes of accreditation. While processes
of accreditation jointly with the introduction of new technologies seem to contribute to
improve the operational and technical effectiveness and efficiency of internal
processes in terms of ensuring quality and high security of procedures and programs,
the strategic management of human resources should serve to sustain operational
processes, sustain motivation and commitment of medical professionals and better
facilitate the interactive communication between patients and healthcare institutions
for building and maintaining public trust between citizens as patients and health
institutions. This study is descriptive. The scope is only explorative. Future research
perspectives should be focused on better understanding both the antecedents and the
consequences of institutionalization of human resource management practices in
health care through a research design based on more qualitative interviews in order to
investigate how processes of accreditation and new technologies are likely to
contribute to the better design and implement human resource strategy.
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918 Strategica 2016
THE DYNAMIC CAPABILITIES IN LOW-COST HIGH-VALUE
COMPANIES: THE ITALIAN HEALTH CARE
Elena QUERCI
University of Insubria
71 Via Monte Generoso, Varese 21100, Italy
equerci@libero.it
Patrizia GAZZOLA
University of Insubria
71 Via Monte Generoso, Varese 21100, Italy
patrizia.gazzola@uninsubria.it
Abstract. The aim of the study is to examine the fundamental entrepreneurial
capabilities and the business models in CSR management from the dynamic capabilities
perspective. The dynamic capabilities are related to exogenous changes: competitive,
technological, and financial and for the emergence of new economies. Every company is
involved in building great capabilities: gaining competitive advantage from the things it
does exceptionally well, creating new business models. The companies in a context of
change have to innovate faster, to minimize labor, raw materials, production and
logistics costs, in order to reduce the inefficiency. The entrance of low-cost high-value
companies into the market has created a new competitive landscape: the low-cost high-
value production philosophy, based on a set of behaviors designed to offer goods and
services at low cost respecting the quality, implementing innovative distribution
processes and modern management policies. Encouraging a consumer style, it can
generate high benefits for consumers, for businesses and for the country's system. The
healthcare sector today is at a crossroads and every nation in the world faces healthcare
challenges Low cost-high value healthcare companies are new entries in those areas of
the competitive system left vacant by the welfare state and meet the consumer/patient’s
new needs to safeguard health with out of pocket payment. The study analyzes the
dynamic capabilities implemented in three low-cost high-value companies: Centro
Medico Santagostino, Odontosalute and Nau! allocated in northern Italy. They signed the
ethical code of Assolowcost and are engaged to increase their Corporate Social
Responsibility (CSR). Whether and how can Low-Cost - High-Value healthcare companies
follow a standard management process to cope with emerging CSR challenges? With
dynamic capability, they can follow the rapidly evolving CSR expectations of stakeholders.
Drawing on the dynamic capabilities perspective can help firms to meet emerging CSR
requirements by following a set of common management processes. Our research findings
contribute to understanding better the capabilities of low-costs high-value companies
and their CSR values.
Keywords: dynamic capabilities; low-cost high-value; prime mover; health care;
Corporate Social Responsibility.
Fostering Entrepreneurship through CSR 919
Introduction
The aim of the study is the proposal of the comprehensive and integrative framework
on management and strategic factors which have lead companies to position
themselves in the low-cost high-value sectors. The global social and economic changes
have induced companies to innovate more quickly and to administer business costs,
from supplies through production and logistics, so as to reduce and contain
inefficiency. The purpose is to offer consumers goods and services with high levels of
real and perceived value, at fair prices. Every company is involved in building great
capabilities: gaining competitive advantage from the things it does exceptionally well,
creating new business models. Dynamic capability is a set of learned processes and
activities that enable a company to produce a particular outcome. The companies in a
context of change are committed to innovating faster, to minimize labor, raw materials,
production and logistics costs, in order to reduce and contain the inefficiency.
The growth of new business ventures is very important; new entrepreneurs and new
ideas entering into an economic-productive system, lead to new goods and production
techniques and encourage the interaction between people, ideas and capital that
results in the inception and development of new fields of business. This, in turn, sparks
a virtuous cycle, leading to the growth of technical and organizational skills that makes
it possible to recreate the pattern in other businesses operating in the same field.
The study focuses on three fundamental aspects:
- The first aimed at selecting the basic concepts and theories from the theoretical
framework of reference, as outlined in the existing body of literature, with which to
analyze data and obtain a picture of the background and competitive environment in
which low-cost high-value health services developed. The final objective is to analyze
the strategies implemented, and the business models of three companies that have
adopted low cost/high value, particularly in the realm of health services and what is
their contribution to corporate social responsibility with the study of “cross-case
analysis” (Osterwalder, Pigneur & Tucci, 2005).
- The second studies and compares the basic theoretical strategies that form the
business model from which low-cost high-value health services develop.
- The third aspect is a cross-case analysis of three companies operating in this sector,
with particular knowledge of the area in which they operate and the develop a
theoretical framework to explain how dynamic capabilities can contribute to their
developing, in order to adopt appropriate marketing and trade policies, taking into
account the strategies of growing and replication of business
Organization of the work and research method
An analysis of changing economic and political choices in health care will be
highlighted if there is a new real space of action for companies to be compared with the
activity of supply of healthcare services. Wanting to prove, therefore, that there is a new
sector that stands between the public and private health care, business health low-cost
high quality and sustainable.
The specific objective of the research is to be put in benchmarking, through the study of
cases (Hartley, 1994), which may act as a guide for those who want to go down this road
920 Strategica 2016
or want to improve their corporate policies in view of low cost high value in order to
maintain the virtuous cycle of economic growth and healthy. The adoption of a
descriptive research design, fieldwork and qualitative method is the default choice in the
structuring of research and considered appropriate to achieving the objectives of the
work to define the business model for Low-Cost High-Value in healthcare providers
(Selltiz, Wrightsman & Cook, 1976).
Case studies are considered the most effective course to come up with answers to
“how” and “why” questions when researchers have only limited control over events, but
at the same time want to explore concurrent trends with the aim of explaining certain
phenomena and casual relationships. This is the reason why case studies and real
stories are the research strategies that are most suitable for this kind of study (Yin,
1989) suggested applying the logic of “literal e theoretical replication”, which is based
either on the identification of cases that will give similar results (literal replication) or
which will give different results, but for predictable reasons (theoretical replication).
The importance of this logic is that it allows for the extension or replication of the
emerging theory. In our case, we have chosen the “literal replication” analyzing three
kinds of companies active in the low-cost/ high-value sector to find their similarities.
They are Italian companies working in northern Italy: the Centro Medico Santagostino
Milan in Lombardy, OdontoSalute Gemona in Friuli - Venezia Giulia and NAU! In
Castiglion Olona, Varese. They are companies that have adopted the low-cost/ high-
quality philosophy by focusing on improving their organization and creating economies
of scale to cut costs, thus making health services available to a wider range of
consumers.
These companies adhere to the ethical code drawn up by the Assolowcost and so while
adopting different business strategies, they must follow similar parameters.
Developing CSR as a dynamic capability starting from the literature review
The authors Teece, Pisano and Shuen (1997) are among the first to formulate a
definition of dynamic capabilities as an organization's ability to integrate, build, and
reconfigure internal and external resources and expertise in response to rapid
environmental changes, Teece, (2010). Following this concept, it is expanded by
Eisenhardt and Martin (2000), which redefine the dynamic capabilities as processes
that use their own resources to cope or even create a change in the market.
In dynamics capability are summarized two key elements: with dynamic refers to the
firm's ability to renew skills in relation to the environment dynamism, while the
capacity is intended to emphasize the strategic management capacity to adapt, integrate
and reconfigure the resources and the expertise within the company with those held by
other organizations to address environmental change or even promote and build it
(Eisenhardt & Martin 2000, Helfat et al. 2007, Teece, Pisano & Shuen, 1997): “dynamic
capabilities [...] emphasizes two aspects. First, it refers to the shifting character of the
environment; second, it emphasizes the key role of strategic management in appropriately
adapting, integrating, and reconfiguring internal and external organizational skills,
resources, and functional competencies toward changing environment” (Teece & Pisano,
1994, p.537).
Fostering Entrepreneurship through CSR 921
Dynamic capability is a set of learned processes and activities that enable a company to
produce a particular outcome. The companies in a context of change are committed to
innovating faster, to minimize labor, raw materials, production and logistics costs, in
order to reduce and contain the inefficiency (Teece, 2011). Therefore, the context of CSR
strategy in question involves the dependence of corporate success on the relations and
interactions between an organization and its stakeholders (Wu, He & Duan, 2014). The
strategic effectiveness of CSR and their features such as dynamic capabilities is
important for emphasize the change in capacity of enterprises to adapt quickly to a
changing environment and its associated impact on organizational performance (Teece
et al., 1997).
Now companies recognize the enormous potential of business to contribute to social
progress and they understand they depend on healthy and well-functioning societies to
thrive. For companies, it is not enough to integrate CSR into strategy (McWilliams,
Siegel & Wright, 2006.). They integrate society into the strategy they reinforce
competitive advantage for the business. In this way they follow the principle of shared
value, it can create economic value in a way that also created value for society paying
attention to its needs and its challenges (Colombo & Gazzola, 2015). The competitiveness
of the companies will increase if they follow the economic and social conditions
simultaneously. Creation of shared value focuses on identifying and expanding the
connections between societal and economic progress. Businesses must reconnect
company success with social progress (Gazzola & Colombo, 2013).
In this way, the company creates economic value by creating social value. The
companies could reach shared value when the interests of business and society are
aligned, (Gazzola & Colombo, 2015). Management needs a new approach to engaging the
stakeholder. Companies must incorporate interaction with stakeholders into decision-
making at every level of the organization. (Browne & Nuttall, 2013). Currently
companies recognize the enormous potential of business to contribute to social
progress and they understand they depend on healthy and well-functioning societies to
thrive Indeed the corporate transformation goes from the external environment
information that is transformed into strategies to change the strategic position of the
company and enable it to remain viable indefinitely in an ethical environment, social,
political, it belongs and with which it interacts not only with a system of monetary
exchange, financial but also through physical, human flows and communications with
which they produce knowledge, confidence and reputation (Harrison & St. John, 1998;
Prahalad & Bettis, 1986). Therefore, the operations of companies should be directed to
improve their dynamic capabilities to meet the changing needs of their various
stakeholders.
In this analysis of the contribution of CSR to the dynamic capability, we need, however,
to remember the voluntary aspect of CSR. Its voluntary nature could give rise to
obstacles to the spread of the phenomenon including the risk of self-referential CSR
policies and the lack of transparency in the markets with consequences both for
business, in terms of reputation, and for the stakeholders (consumers first place), who
are unable to discern social responsibility solutions from those wishing to offer just
appearance and to go beyond the image and philanthropic business activities
The Green Paper of the European Commission, COM (2001) may be helpful because,
out of it, one can deduce a number of fundamental principles of the social responsibility
922 Strategica 2016
of "enterprise summarized as follows:
- recognition of voluntary nature of CSR;
- need to make credible and transparent socially responsible practices;
- recognition of the agreements and existing international instruments: standardization.
examination of areas of law in national contexts of reference and profusion of a
commitment that possibly go beyond the aspects regulated by legal requirements;
- global Approach: understanding of the economic, social and environmental, as well as
the interests of consumers to act sustainably in accordance with long-term logic.
Information that is more recent was issued by ISO in November 2010. It is an
international standard designed to provide the tools to manage better the principles of
corporate social responsibility. ISO 26000 is applicable to all types of organizations, is a
guideline approved by the representatives of 91 countries of the world, based on the
best practices on the topic and is a model to help organizations implement best
initiatives in order to optimize internal processes and operate in a socially responsible
way towards its stakeholders (Castellani, 2015).
An Organization that it will follow the standard ISO 26000 will have to be integrated
into business practices the principles contained in the standard, monitoring and
responding to economic expectations, environmental and social expectations of all
stakeholders, a working logic synthesis is presented in Figure 1.
Figure 1. Specimen layout ISO 26000 (Italian Centre for Social Responsibility, 2016)
The dynamic capabilities in Low-Cost High-Value healthcare companies: case
works
In the Italian economic system of crisis found him in a situation of resources limited
and the Italian National Health Service is struggling to deal with many problems like
Fostering Entrepreneurship through CSR 923
inadequate treatments due to insufficient staff and long waiting lists, mainly caused by
lack of hospitals, inefficient bureaucracy, poor management and general
disorganization which all contribute to cost increases. This is mainly due to the shift
from the National Health Service to the private sector and to the trends towards
privatization occurring on a global scale. This has led to an attempt to overcome the
economic downturn due to the privatization of assets and services, through the
creation of new areas of market and the expansion of existing ones by increasing their
profitability (Querci, 2014). Low-cost healthcare providers, encouraged by the opening
up of new market areas, particularly those in the lightweight care areas, are privileged
correspondents of voluntary healthcare funds, while accredited private providers and
the National Health Service itself often find it difficult to conform to the operating
systems of company health funds which take into consideration things like on-line
appointments, short waiting lists and even pleasant environments (Pessina, Cantù,
Carbone & Ferrè, 2011).
Low Cost- High-Value healthcare companies are new entries in those areas of the
competitive system left vacant by the welfare state and they meet the
consumer/patient’s new needs to safeguard health with out of pocket payment. In
many cases, they are prime mover companies that launch innovations, invest in the
development of new products, and accept the risk of exploring unknown territory.
Consumers' requirements are always evolving, particularly in the sectors of
healthcare; with regard to the former one, there is a widespread need for new services,
ranging from psychological treatments to plastic surgery, and to find a balance
between public and private costs (Ramdorai & Herstatt, 2015). Their company mission
is to provide low-cost quality health care while at the same time meeting the
commitment of company health funds to provide the required services to their
members. Normann, (2002) calls prime mover innovator/inventor those individuals
that he considers “creators of sleeping assets markets". The prime mover transforms
these assets into liquidity that can be advantageously employed in a different context.
In this sense the prime mover makes all the players richer, leading others to identify
untapped assets to be exploited, such as, in the realm of low-cost high-value health
services, short waiting lists, comfortable accommodation and convenient geographical
locations. They have a new approach to subjects capable of impacting on the outside
environment. They are organizations that don’t only understand the changing market
but, in some ways, implement or direct the change itself (Normann & Ramire, 1998). The
three cases studied, are Centro Medico Santagostino (CMS), OdontaSalute and Nau!
though offering different types of goods and services shared certain common elements
like business strategies, the organization of their supply chains and customer
satisfaction and orientation.
The three companies are characterized by profit margins based on industrial
production; dental prosthesis and specialties for the Centro Medico Santagostino and
dental prosthesis Odonta Salute, Nau! It manufactures and sells eyeglasses, sunglasses,
and contact lenses. They are companies that have adopted the low-cost/high-quality
philosophy by focusing on improving their organization and creating economies of
scale to cut costs, thus making health services available to a wider range of consumers.
These companies adhere to the ethical code drawn up by the AssoLowcost and so
while adopting different business strategies, they must follow similar parameters. The
ethic code of Assolowcost promotes the principles of Corporate Social Responsibility
and in this case, it is coincident with what is prescribed by ISO 26000. The function of
924 Strategica 2016
the ethical codes is to present the charters of rights and fundamental duties, with
which the company clarifies its ethical and social responsibilities towards the various
internal stakeholders (shareholders, employees, and management) and external
stakeholders (customers, suppliers, competitors, the social and natural environment
surrounding and public institutions). Through the code of ethics, despite their
differences, it’s possible to make explicit a kind of "social contract" that binds the
company to the various groups and individuals that interact directly or indirectly with
it (Sacconi, De Colle & Baldin, 2003). Companies associated with Assolowcost must
respect the general principles of his code of ethics; the companies should commit to
put at the center of their strategies geared towards sustainable economic development
to improve the quality of life, to try to meet the needs of society and the communities
in which they operate, helping to solve problems and respecting their cultures,
religions, and traditions, with particular attention that their activities do not conflict
with the protection of the rights and dignity of man (Querci, 2016). The company chose
Legambiente as partners; the association, which works to protect the environment.
Their aim is to promote and enhance the wide variety of production activities (local
products, cultural heritage, technical innovation and maintenance of urban and
regional), which are able to improve the quality of the environment and to give more
competitiveness for Italy. The crew of the schooner green wears glasses recycled
plastic Nau!
Nau! signature and supports projects for the defense and preservation of the
environment supports campaigns to protect the ecosystem and donates, for every pair
of glasses sold in recycled plastic, a contribution to Legambiente (Querci, 2013).
Concern for the environment has led Nau! optics to realize the first eyeglasses and
sunglasses in recycled plastic. The particularity in the processing is that the recycling,
defined pre-consumer, takes place with the use of milling and curls of machining of its
frames. The production process of these collections is certified by the Institute for the
Promotion of the plastics for recycling that issued the Certificate of Conformity Plastic
Second Life - Category B. The line of eyewear. The brand, in just 10 years has created a
network that has now reached a height of 100 stores, employing over 450 people. The
Centro Medico Santagostino operates outside the system of accreditation of the NHS
and it is stated in the private sector, but in a quasi-market, between profit and non-
profit.
The Centro Medico Santagostino is an innovative project which cannot be separated
from economic revenue. In fact, although the primary objective of lenders is not profit,
but the exploitation of economically sustainable initiatives for social interest, to start a
project of this nature serve specific skills, as well as a substantial capital to invest in
the early stage, but also in conservation of a high standard of quality throughout the
process of affirmation and development of the initiative (Mariani, 2012).
OdontoSalute has fourteen locations in Italy, ample parking, near airports, and
motorway exits. Seven clinics are owned by other franchise agreement, they have
special agreements with hotels, restaurants and transportation companies to ensure a
pleasant stay during treatment. Large volumes of sales and narrow margins are the
philosophy of all three companies and suppliers have had to conform to this same
policy. Just one of the dental clinics of the OdontoSalute group invoices, in one month,
what a traditional dental clinic invoices in a year, giving it a strong bargaining position
with suppliers, which are never very numerous. The strategies to contain costs benefit
Fostering Entrepreneurship through CSR 925
patients who are offered quality services at lower prices than those of the competition,
with minimum waiting lists and easy access to care. The social report of OdontoSalute
highlights its approach with stakeholders to its Corporate Social Responsibility and
evaluate the benefits produced by the multiplicity of outcomes that positive
relationships are maintained with the communities, or social groups, represented by
all agencies, organizations, formal organizations and informs them that they are in
contact in various ways with the clinics.
Conclusion
The enterprises studied show that the adoption of CSR process since their formation
can be developed in a dynamic capability that provides a competitive advantage. The
establishments of enterprises under study were born between 2008 and 2009 as a
prime mover. They anticipated the ISO 26000 dell'Assolowcost adhering to the code of
ethics. To this end, we can say that good practices are creating new ways to conduct
valid and replicable. The growth rate of Odontosalute, Centro Medico Santagostino and
Nau! It is very high. The first began opening new dental centers by entering into
contracts franchising, passing from the first 6 clinics between 2008 and 2011 to 26
today, distributed throughout Italy. Santagostino Medical Center has replicated its
business by opening three other clinics. The Nau! It has become international, opening
in India and in Dubai, reaching more than 100 stores. CSR is an idea whereby our
companies integrate economic, social and environmental concerns in their business
operations. CSR balances the needs of stakeholders.
In all three businesses, Human resources are considered an asset, hiring procedures to
focus on finding that professional employees share the company mission. The choices
made by Nau! for the low environmental impact, for Environmental Benefits are
encountered relate to the recovery and reuse of waste materials resulting from the
normal production of optical frames and sunglasses. The use of renewable energy
sources in the stores and shoppers biocartene, that can be reused by the customer for
wet waste disposal and elimination of unnecessary packaging in liquids, solutions, and
contact lenses are choices made by Nau! of the low environmental impact. Nau! for
working the lenses enters directly into the production cycle of the Zaiss. It’s used a
computerized machine that makes direct contact with the manufacturer of lenses. In
this way, the company conquers efficiency. The savings and margins are for customers,
with a saving of 50% on average compared to the competition on the market. Centro
Medico Santagostino is an innovative project the exploitation of economically
sustainable initiatives for social interest, to start a project of this nature serve specific
skills, as well as a substantial capital to invest in the early stage, but also in the high
level of quality during storage the whole process of affirmation and development of the
initiative. The social report of OdontoSalute highlights to its Corporate Social
Responsibility and evaluate the benefits produced by the multiplicity of outcomes and
the positive relationships maintained with the communities or social groups.
926 Strategica 2016
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928 Strategica 2016
FROM SHAREHOLDERS-VALUE CREATION TO CORPORATE SOCIAL
ENTREPRENEURSHIP
Patrizia GAZZOLA
University of Insubria
71 Via Monte Generoso, 21100 Varese, Italy
patrizia.gazzola@uninsubria.it
Piero MELLA
University of Pavia
5 Via San Felice, 27100 Pavia, Italy
piero.mella@unipv.it
Abstract. The aim of the paper is to understand how Corporate Social
Entrepreneurship (CSE) is an important logical and operative step to take after realizing
the Corporate Social Responsibility (CSR) strategy, in order to drive the entrepreneur to
both economic and social value creation. The firm’s need to consider and satisfy in a
balanced way the needs and interests of all stakeholders had already been amply
highlighted by economists belonging to the behaviorist school (Simon, 1961; Cyert &
March, 1955). In this sense, and especially with regard to medium- and large-sized
enterprises, the creation of value, a typical goal of stockholders, should be considered in
the process of optimizing an objective function that is larger and more complex, resulting
from a "political compromise" regarding the aims of the different classes of stakeholders.
In particular, this function must be compatible with the needs of the external
environment, taking into account the influence of cultural roots in a context of CSR (Mella
& Gazzola, 2005). Entrepreneurship is the “art of the start”, or the ability to start up a
profit-seeking venture and then grow it into a business that makes great financial profits
for the shareholders. Corporate Responsibility is the art of managing already operating
for-profit businesses in ways that are beneficial to others stakeholders beyond the
company founders and investors: employees, operating partners, consumers, entire
communities and even our natural world, or global environment. Social entrepreneurs
embed corporate social responsibility into the start-up business model. They start the
companies with a culture based on the building of a team with employees and other
stakeholders. They aim to improve the environment by driving net-positive social impact
results. They impose a wider shareholder vision from outputs to outcomes that add a
mandate beyond shareholder value creation to value creation for stakeholder groups.
CSE can drive companies by bringing business, social, and sustainability goals together,
making the world a better place, while creating business opportunities at the same time.
They see how these two goals are not different, but can be aligned and translated into
outcomes for a sustainable impact. This study aims to describe ways of identifying the
principles of Corporate Social Entrepreneurship that allow a more meaningful
understanding of the behavior of modern corporations. The analysis of the international
literature will be accompanied by the results obtained from empirical research extended
to Italian companies.
Keywords: Corporate Social Responsibility; creation of value; stakeholder; sustainability
report; corporate social entrepreneurship.
Fostering Entrepreneurship through CSR 929
Introduction. The shareholders’ interests
The severe financial crisis that first hit the United States and subsequently European
countries, along with the numerous scandals of recent years, the corruption of
managers, and fraudulent financial statements, have necessitated an ever deeper
integration between the objective of shareholder value and the practices of CSR (Jones
& Nisbet, 2011). The reasons for this deep integration between the interests of
shareholders and those of other stakeholders are revealed not only if the company
assumes increasingly important connotations, particularly in local communities to
ensure the social (Doh & Guay, 2006) and occupational context, but also by the
increasingly strong influence of the corporate image that inevitably reflects the choices
of investors and consumers in the first place and those of all other stakeholders. The
integration between the objective of the creation of value and CSR is an unavoidable
process, typical of the modern economies, resulting from the interconnection between
internal goals of the enterprise and the outcome to the environment. This integration
testifies to the profound change in the logic of the firm that has occurred during the
last one hundred and fifty years (Scherer & Palazzo, 2008).
The capitalist enterprises, understood as autonomous organizations for production,
which are financed by shareholders with equity, and by debt, has ancient origins, and
its spread can be traced back even before the start of the Industrial Revolution in 1750.
In the traditional literature, capitalist firms are, strictly speaking, business profit-
oriented organizations that are conceived of as systems for the creation of economic
and financial value for their shareholders (Mella, 2007). Their performance – based on
profit and the value of capital – is measured by a system of monetary values.
For the production of value, capitalist firms must carry out five parallel transformations
(Mella, 2005):
- a productive transformation of factors into production, governed by productivity and
by quality;
- an economic transformation of costs and revenues into operating income, governed by
prices and therefore by the market;
- a financial transformation of capital into returns;
- an entrepreneurial transformation of information into strategies;
- a managerial (organizational) transformation of strategies into actions of management
control.
The success of the capitalistic firm in producing economic value depends on the
capability of the entrepreneur, together with his management, and should be based on
these rules:
- create a dynamic portfolio of businesses along a virtuous path from “question mark”
to “cash cow” businesses by means of an effective entrepreneurial function;
- regarding decisions to start up or continue businesses, it is necessary to take into
account their economic efficiency, the amount of capital invested for their start up, and
the sources of available financing;
- achieve the maximum exploitation of the present market and expand toward new
markets in order to increase the firms’ production volume, QP, and increase as much as
possible the selling price, pP, through an efficient marketing function;
930 Strategica 2016
- maximize the productive efficiency of the production transformation, by contracting
the unit factor requirements, qF, while expanding the quality of products by means of
an efficient production function, thereby increasing productivity;
- reduce the average factor prices, pF, through an efficient supply function which
searches for supply markets where the factors have a higher quality and lower
purchase prices.
The production of value does not exclusively benefit the shareholders but instead
concerns a vast group of stakeholders.
The evolution of the shareholder theory: the literature review
The Industrial Revolution gave rise to large production firms with substantial flows of
goods. These firms required large plants with a substantial productive capacity and
high specialization. The large amounts of capital were provided by individuals or
families, or raised through significant amounts of self-financing, thereby giving rise to
typically family-run businesses belonging to a capitalist family head or a family. The
large size of the plants required a large amount of capital, and their specialization
made it impossible to shut down the plants short of selling the entire enterprise, with
its factories, warehouses, and clientele. Precisely because it was not possible to recover
the invested capital, the maximum objective of the capitalist family head was, on the
one hand, to obtain the maximum flow of profits, and on the other to maximize the size
of the enterprise through monopolistic policies.
The creation of the corporation, through the issuing of shares, was the means of
resolving the problem of recovering the capital supplied by the entrepreneur-family
head, through the increase of equity to non-industrial third party savers. In this
context, in the years following the First World War, high-level professional managers
became more common in corporations; these managers were directly appointed and
charged with managing the invested capital (with the obligation to issue periodic
financial statements) provided by the shareholders meeting together in an assembly.
The managers-administrators gradually gained more control over the corporation’s
management, leaving to the capitalist family head the ownership of the capital and the
final periodic control of the activities of the administrators, who were charged with
producing a profit. In the large corporations, there was a clear separation between
management and the ownership of capital. This phenomenon was studied by Berle and
Means already back in the 1930s. In their well-known book, The Modern Corporation
and Private Property (1932, p.130), they analyzed in depth the separation between
ownership and control, a phenomenon which “... has destroyed the unity that we
commonly call property - has divided ownership into nominal ownership and the power
formerly joined to it. Thereby the corporation has changed the nature of the profit-
seeking enterprise”. The separation between management and ownership also changed
the views about the firm’s objectives. Profit gave way to return, that is, profit in
relation to the capital needed to produce it. Return on equity (ROE) replaced income in
all calculations of the provider of equity.
In this new context, the legal form of the corporation – which rapidly spread in all
industrialized countries as an instrument for raising equity through the stock exchange
– made it clear that the value, or price, of shares, was simply derived from the
Fostering Entrepreneurship through CSR 931
discounted value of the corporation’s dividends, which in turn depended on the level of
roe that could be produced by the company over a more or less extended period in the
future. The enterprise, as a company, no longer had its own objective. Instead, the
objectives were transferred to the managers-administrators, who had to achieve the
maximum shareholder value by maximizing the return on equity, bringing the latter to
a level greater than that of the return expected by the investor. In this way, the stock
market value and the company’s capitalization would be maximized, in the manner set
out by Copeland, Koller, and Murrin (1996), which is shown in Table 1.
From the legal point of view the shareholders are the owners of the company;
however, “agency theory” (Jensen & Meckling, 1976) states that the manager-
administrator should act in the interests of the shareholders (and thus be their
“agent”). As a result, the value created by the firm belongs to the shareholder.
Managers who do not act in the interests of the shareholders must be replaced
following the rejection of the balance sheet of the company they manage.
The managers of large corporations use every strategy imaginable to maximize
shareholder value since they are deemed “capable of managing”; they are kept on and
paid as long as the shareholders are satisfied with the periodic dividends and the
increase in the value of their shares.
Table 1.The principles of the creation of value (Copeland et al., 1996, pp.53-54)
The principles of the creation of value
1. The firm creates value when the return on the invested capital is higher than the
opportunity cost of the capital (measured by the return on an investment of equal
risk).
2. The more the firm invests at a return higher than the cost of capital, the more value it
creates (growth creates more value the longer the return exceeds the cost).
3. The firm must choose those strategies that maximize the expected discounted cash
flow (discounted at the opportunity cost of the capital).
4. The value of the shares of a firm in the stock market is equal to the value of the
expectations the market itself has regarding future results, but these expectations are
not necessarily a reliable measure of those results.
5. The return on the capital from shareholders depends on more on the variations in
expectations about the future than on the present results of the firm.
The stakeholders’ interests
Clearly, the management of the value-producing firm, which strictly follows the
principle of corporate economic rationality, tends to distinguish between the financial
interests of shareholders and the non-financial interests of the other stakeholders.
Companies constitute the economic, social and political “fabric”, and their management
becomes closely linked to all the outside actors since the internal processes are
intrinsically connected to the outside environmental processes. The creation of a
shared and efficient network of relations among the firm and its environment of
reference becomes the condition for the production of value. Thus, management
cannot limit itself only to pursuing the interests of the shareholders but must seek
consensus from the local, national and international stakeholders, involving these
social entities that, in order to advance their non-financial interests, impose
constraints and conditions on the corporation’s activities.
932 Strategica 2016
Recognizing that the activities of corporations have a growing social, ecological and
ethical impact, which can be perceived and measured with regard to the stakeholders
(Carrol & Bucholtz, 2008), and that the CSR principle represents the necessary
integration between the internal management of the firm (Hill, 1992), from the point of
view of value production based on corporate economic rationality, and the
management of the outside environment through the processes of supply, marketing,
work, finance and environmental conservation and through the relationship with
workers and the local authorities, Davis (1975) proposes five interpretative points
regarding CSR:
- Social responsibility derives from social power.
- The firm is an open system in two ways: in receives inputs from society and provides
results to society from its activities.
- The social costs and benefits of all business activities must be carefully calculated and
valued in order to decide whether or not it is socially useful to engage in such
activities.
- The social costs of each activity must be borne (in some form) by the clients.
- Firms, as social institutions and also as citizens, have the responsibility of facing
social problems even if these lie outside their normal sphere of activity.
McGuire and Sundgren (1988) believe there is a physiological link between the
production of shareholder value and Corporate Social Responsibility, a link that
management must recognize and transform into constraints and opportunities,
thereby joining the satisfaction of shareholders to the needs of all the other
stakeholders.
The integration between shareholder value and corporate social responsibility
The maximization of the performance of the stakeholders and all forms of value
consumed, managed and generated by the company, implies the passage from the
traditional notion of value created for shareholders to the sustainable value for the
social, political and physical environment (Elkington & Fennell, 1998). The creation of
value must be a process compatible with the needs of the environment (Mella &
Gazzola, 2005) and involve the optimization of a complex objective function, which
results from a political compromise of the different needs and interests of all
stakeholders who refer to it, as has already been amply highlighted by economists
belonging to the behaviorist school (Cyert & March, 1955; Simon, 1961).
The opposing interests regarding the distribution of the value added can affect both
the definition of the characteristics of production and the relationship with customers,
workers, suppliers, and lenders.
The way in which these conflicts can be resolved greatly affects the production of value
because, in simple terms, it is possible to view the solutions in terms of costs and
revenues for the affected stakeholders. Therefore, a price reduction, in the same
conditions of demand and competition, which leads to a reduction in revenues and
profits, penalizes the return on capital (internal interest) but serves the firm’s
customers (external interest). Similarly, an increase in the remuneration of labor,
though reducing profit, creates benefits for workers. Companies, following the
affirmation of stakeholder theory (Freeman, 1984), have had to redefine their
competitive strategies and how they manage social and environmental issues as
Fostering Entrepreneurship through CSR 933
assessed by shareholders and judgment of legitimation of new groups of stakeholders.
Consequently, communication with the outside world represents an important
opportunity for the company to increase its social acceptability and to offer its point of
view as understandable as possible, objective and verifiable.
To respond to the new information needs expressed by society, it was necessary to
define the characteristics of an instrument of social and environmental reporting
(Marcus & Fremeth. 2009) which, together with the traditional information tools,
enables companies to implement a strategy of widespread and transparent
communication able to pursue consensus (Jennings, 2005) and social legitimacy, which
are a prerequisite for achieving any other goal, including the type of earnings and
competition.
Do image and credibility increase value?
The reasons that push companies to voluntarily disseminate information about their
ethical behavior (Michaelson, 2010) and their relationship with the social and natural
environments are characterized by the consequent advantages in terms of economy,
image and credibility that increase their overall value (Orlitzky, Schmdt & Rynes, 2003;
Siegel, 2009; Skrabec, 2003). Being a voluntary document, there currently is no general
and unique standard for the preparation of a sustainable report; therefore, a company
can take what it feels is closer to its reality and size, choosing between the most
popular national and international models.
The European Commission called all large companies listed in the Triple Bottom Line
Reporting (Elkington & Fennell, 1998) to communicate to stakeholders their economic,
social and environmental performance, integrating the economic dimension of
management with the social and environmental dimension (Bennet & James, 1999), for
the benefit of relationships with its stakeholders and markets. Economic prosperity,
environmental quality, and social justice are the pillars that underpin the creation of
business value in accordance with the "triple bottom line" (Warren, 1999). In order to
make such communication effective, some basic rules have to be implemented ,such as
a) the involvement of top management; b) the presence of various instruments of CSR;
it is important that the single practice of CSR be inserted into a system of initiatives
and socially-oriented behavior, which in turn is integrated into corporate strategy
(Porter & Kramer, 2006); c) the economic compatibility of the social actions; d) the
internal coherence and integration with business strategy; e) the insertion in the
specific national, regional or even local context, taking into account factors such as
history, culture, level of socio-economic development, the role of the state, etc., which
can lead to a different assessment of the intervention of CSR; f) the communication of
operations with a suitable document (Gazzola & Colombo, 2013).
In addition, strategies for CSR communication have evolved considerably in the past
and are now better integrated with the objectives of profit and value creation for
shareholders. The sense-making theory has been introduced (Craig-Lees 2001;
Cramer, Jonker & van der Heijden, 2004), later expanded with the concept of sense
giving (Gioia & Chittipeddi, 1991; Morsing & Schultz, 2006), showing the necessary
application of three fundamental strategies:
- stakeholder information strategy ("give sense")
- stakeholder response strategy ("make sense")
934 Strategica 2016
- stakeholder involvement strategy
Empirical research on Italian companies
In order to analyze the process of integration between creating shareholder value and
CSR, we present an empirical study that analyzes the top five larger Italian companies
by total revenues for the financial year 2014 in the Global 500 list of Fortune: 1) Exor
Group (162 billion $), 2) ENI (147 billion $), 3) Assicurazioni Generali (119 billion $ ),
4) Enel (101 billion $), and 5) Unicredit Group (43 billion $) considering the evolution
of corporate statements issued to shareholders and stakeholders over time.
1) For Exor Group we have considered the information relating to Fiat Group, Fiat
Industrial and FCA Group since they were the major companies in the group. The
creation of shareholder value represented in the 90's a fundamental cornerstone of the
company (Gavosto, 2002). In recent years, they paid considerable attention to the
social component, "In the Fiat Group, the integration of economic decisions with those
of a social nature and the environment is a major concern for long-term value creation”
(Fiat Group, 2010). In 2014, FCA was born and in the CSR agenda, it is stated: “Good
corporate citizenship and corporate responsibility are important parts of our identity,
both as an employer and a regulator. They sit at the heart of our culture and are part of
everything we do”. FCA is in the Dow Jones Sustainability Index (DJSI) World.
2) Eni SpA, in 90's, evidenced the goal of creating value for shareholders: "The aim of
ENI is to create shareholder value through the continuous improvement of cost
efficiency and quality of products and services for its customers" (ENI, 1997). In 2007
ENI published the first Sustainability Report and the Code of Ethics. The objectives of
sustainable development and corporate responsibility were placed in the foreground
in ENI’s corporate reports: "Besides the general principles of law enforcement, of
transparency, of honesty, of fairness and good faith, the Code of Ethics foregrounds the
objectives of sustainable development" (ENI Code of Ethics, 2007). In the Sustainability
Report 2015, the creation of sustainable value is in the center. The responsible model
is: “To support communities and create value over time. For us acting in a socially
responsible way means respecting people and their rights, guaranteeing their safety
and safeguarding the environment” (ENI, 2015)
3) In 2000 Assicurazioni Generali Group adopted the creation of shareholder value as a
key strategic line (Generali Group Strategic Plan 2003-2005). In addition to the
Sustainability Report, for the last two years, we have presented an Integrated Report,
to make clear how sustainability is integrated into the business and underpins its
development and its results. In the 2015 edition, the Report focused in particular on
innovation, as a guarantee of value creation in the long-term and to tackle the most
important issues of corporate responsibility. Particular attention was paid to the
initiatives promoted by the Group companies in support of the 17 Sustainable
Development Goals, representing the agenda launched by the United Nations to
promote sustainable development by 2030 (Generali Group, 2015).
4) Enel SpA, in its 2002 Annual Report, showed the great importance it gives to
creating value for shareholders: "Our priority has been the refocusing of Enel, which
involves concentrating our resources where we have experience with crafts,
Fostering Entrepreneurship through CSR 935
technologies and expertise in order to create value for shareholders" (Enel, 2002). The
situation changed in the years and Enel Chief Executive Officer is one of the first
signatories of the UN “Sustainable Stock Exchanges”. In 2015, Enel signs the women
empowerment principles (WEP), the initiative promoted by the UN Global Compact
and UN Women, which seeks to promote gender equality by calling on companies to
apply seven principles for the promotion of women in business (Enel ,2015).
5) Unicredit in the Annual Report of 1999 adopted a statement directed mainly at its
shareholders, using as a key performance measure ROE (Return on Equity). In 2000
they started to present the Sustainability Report with the objective of creating value
for all stakeholders. In this challenging period, Unicredit has put itself on a path to
sustainable profitability with the launch of the 2013-2018 Strategic Plan. They prepare
an Integrated Report with GRI and Global Compact indexes. Unicredit is a Sustainable
Bank “Unicredit's strategy will result in a rock-solid, profitable bank that is able to
generate sustainable value, maintain a strong balance sheet and support the prosperity
of the territories where it operates”. In so doing, it “will create value not only for our
Group but also for the stakeholders, communities, and society as a whole, while
minimizing negative impacts on the environment” (social Profile Unicredit)
Conclusions
It is a common belief that the creation of shareholder value cannot be the first and the
only goal of the company and that shareholder interests should be combined with
those of other stakeholders so as not to create imbalances and subsequent questioning
of the management.
The empirical analysis shows results where the tendency, growing stronger in recent
years, integrates the values and principles of CSR with the objectives of profit and
value creation for shareholders. The objective of creating shareholder value can be
expressed unambiguously. It is based on data that can be compared with the past, with
the sector average or with those of competitors.
Whereas the ultimate goal of the survival of the enterprise is to create value, the
processes that generate this must be sustainable, which means the long-term
involvement and satisfactory remuneration of the various stakeholders, who give
resources to the functional long-term success of the organization (Moon, 2007).
Therefore, these processes should enhance and strengthen the firm-environment
relationships, ensuring their sustainability. It is possible to say that sustainability of a
company depends on the sustainability of its relations with stakeholders. We speak of
sustainable value for sustainable relationships, best described as stakeholder value
(Figge & Schaltegger, 2000; Freeman, Harrison & Wicks, 2007). Social responsibility
becomes a structural dimension of firms, which, in achieving their typical production
mission, inevitably exert an influence on a variety of subjects, creating or destroying
value for each of them. However, the biggest problem is finding a balance between the
different interests without undermining the ability of the firm to attract capital
resources and professionally prepared human resources. In any case, we note that the
synergy between the social environment and the economy is not automatically
implemented; instead, it is the result of a path where professional management and
entrepreneurial creativity are linked in order to contribute to a business development
936 Strategica 2016
that takes account of the stakeholders. Management should constantly observe the
characteristics of its stakeholders and estimate their power against pre-established
objectives, in order to build a matrix of priorities to be achieved in their interest. To
achieve this goal, we need to build an appropriate communication strategy directed at
the internal and external stakeholders that, at the same time, allows appropriate
feedback to be received from all stakeholders (Mella & Gazzola, 2015).
The need for the integration between CSR and shareholder value has, in recent years,
been strengthened. Corporate Social Entrepreneurship (CSE) is a necessary and logical
step to take after realizing the CSR strategy (Baron, 2007), and to take join economic
and social value creation to the next level. CSE emerges from the three conceptual
frameworks: entrepreneurship, corporate entrepreneurship, and social
entrepreneurship (Austin & Reficco, 2009). It is proactively in pursuing social
progress, thereby maximizing positive impact, by using societal challenges as a driver
for innovation in the company.
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Fostering Entrepreneurship through CSR 939
RETHINKING ENTREPRENEURIAL CULTURE TOWARDS CSR
Patrizia GAZZOLA
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
patrizia.gazzola@uninsubria.it
Gianluca COLOMBO
University of Lugano
Via Buffi 13, Lugano, Switzerland
gianluca.colombo@usi.ch
Abstract. The paper aims to show how Corporate Social Responsibility (CSR) can drive
the entrepreneurial culture and help to the success of the business. In the paper CSR is an
important pillar of the change-management project with implications for
entrepreneurial culture and business practice, on the one hand, entrepreneurial business
innovation offers opportunities to CSR, on the other hand, sensitivity to CSR offers
opportunities for entrepreneurial business innovation. Nowadays entrepreneurship and
innovation are complementary because entrepreneurs implement inventions, their own
or those of others; that is, they find ways to get the given invention to market by
addressing issues of affordability, quality, durability, accessibility, etc., in a way that
meets the needs of the customers in that market. Entrepreneurs with the CSR culture do
the same thing for people facing social challenges and for the environment. The
entrepreneurial culture is not a one-way street, something to be imposed upon people; it
is based on the individual social responsibility (ISR). ISR is the propensity to take a
personal stand to try and positively influence and affect the people and environment also
outside their immediate circle. Companies comprise of individuals and determine the
social responsibility culture; ISR is the base of the personal culture. ISR is capable of
maintaining the balance between ethics and profitability that satisfies both the society
and businesses (McDermott 2009) and help business to successfully continue. The
importance of the role of personal values in an individual’s decision-making and
subsequent behavior was already studied but a gap in the literature exists for a
connection of the ISR values of the entrepreneur with the entrepreneurship. Due to the
insufficient attention is given to the role that personal values play in the application of
the entrepreneurial decision in the context of CSR a qualitative approach to this problem
is chosen. This paper highlights how CSR culture may act as drivers of the behavior and
pays particular attention to the culture of the entrepreneur, thereby linking the existing
debate on CSR with the field of entrepreneurship.
Keywords: entrepreneurship; an entrepreneurial culture; CSR; innovation; individual
social responsibility.
940 Strategica 2016
Introduction
Some innovative entrepreneurs have the idea to change the world. Nevertheless, if
they have such ambition they also must evolve their entrepreneurial culture
(Beugelsdijk, 2010; Mueller & Thomas, 2001). Business ethics, leadership, and values
are an important part of the entrepreneurial culture. These important issues in
business and society are considered as vital ingredients for the long-term success of
businesses (Engelbrecht, Van Aswegen, & Theron, 2004). Over the last decade, there
was an increased interest in the societal role of corporations; this movement was
originated with Ansoff (1979). Unethical behavior is the basis for corporate scandals
and fraud or the creation of misleading financial reports. Issues like these have
sensitized people worldwide towards the degree of CSR displayed by companies. The
base of CSR is the conduct of entrepreneurs. To contribute to an ethical climate, leaders
at the top or business organizations have to feel that there is a need for ethical
behavior and that strategic importance has to be given to ethical and moral values. As
characteristics of top-level executives appear to be related to organizational outcomes
(Matthews, 1987). They are the ones that have to think and act based on ethical and
moral values. Normally the term “sustainable business,” is connected with CSR: energy
efficiency, reduced carbon footprint, recycling and reuse, fair treatment of employees,
and charitable giving, among other considerations, in the paper we argues that it is
connected with the entrepreneurship culture (Hayton & Cacciotti, 2013) and the base
of this culture is the individual social responsibility (Coda, 2010).
Starting from this conceptual framework, the focus of this work is on entrepreneurial
culture. Such values are linked to personal attributes of entrepreneurs but are also
connected to anthropology factors (historical, social and cultural) being profoundly
rooted in socioeconomic context. In taking into account the Stakeholder theory and the
business case of CSR a research model was developed to test the impact of ethical
values and individual social responsibility on CSR.
The research questions posed at the basis of this study are the following:
- How can we have CSR without individual social responsibility?
- What is the importance of sharing common values that originate from and are
reinforced by the entrepreneurs’?
- Are social business enterprises maximizing social benefits or maximizing profits?
To answer the question we analyze the case of Grameen-Danone Foods Limited that
produces profits for the people and the planet.
Literature review
According to Burns (2008) we consider entrepreneurial culture the personal qualities
of successful entrepreneurs and the manner in which they do business. The culture
drives the mission of the companies. The scope in which the mission-driven
enterprises operate is known as “social entrepreneurship”. This is a new concept, but it
is not a new phenomenon (Dees, 2001). Although the term is relatively new, social
entrepreneur (Johnson, 2000), can be found throughout history (Banks, 1972; Drucker,
1979). According to Nicholls (2006), the concept of social entrepreneurship was first
used between the 1970s and the 1980s. Davis (2002) considers the term widely
credited to Bill Drayton. He is the founder of the social venture philanthropy, Ashoka in
Fostering Entrepreneurship through CSR 941
1981 with the goal of supporting individuals solving social needs using the same tools
and skill sets as profit based entrepreneurs (Bornstein, 2007). Drucker argues that
social entrepreneurs “change the performance capacity of society” (Gendron, 1996,
p.37) while Henton et al. (1997, p.1) speak of ‘civic entrepreneurs’ as “a new
generation of leaders who forge new, powerfully productive linkages at the
intersection of business, government, education, and community”. The study of Hines
(2005) identifies the challenges that social enterprises face in achieving their social,
economic and environmental objectives. Schulyer (1998, p.1)) describes social
entrepreneurs as “individuals who have a vision for social change and who have the
financial resources to support their ideas....who exhibit all the skills of successful
business people as well as a powerful desire for social change”. Boschee (1998)
presents social entrepreneurs as “non-profit executives who pay increased attention to
market forces without losing sight of their underlying mission”. Thompson et al. (2000,
p.328) describe “people who realize where there is an opportunity to satisfy some
unmet need that the state welfare system will not or cannot meet, and who gather
together the necessary resources (generally people, often volunteers, money, and
premises) and use these to ‘make a difference’”. Mair and Marti (2006) argue that
social entrepreneurship as a practice that integrates economic and social value
creation has a long heritage and a global presence. Research on social
entrepreneurship has been a topic of increasing interest since the 1990s (Dees, 2001;
Mair & Marti, 2006) as a result of increased global social problems (Bornstein, 2004).
According to Allan, there are three schools of thought on how social enterprises should
be promoted and each of these schools will emphasize one of the common
characteristics of social enterprises, such as enterprise-oriented, social aims and social
ownership. Ul Islam (2007) analyzes the model for poverty alleviation through social
enterprise, thus providing ways and means to set up sustainable institutions in the
direction of offering support for people in poverty. One of the author conclusions is
that the social enterprises can be set up in urban slums through joint ventures
between non-profit organizations and small businesses that have the capacity to
expand.
Diochon (2010) considers entrepreneurial strategy, which is understood as “a
comprehensive action plan that identifies a long-term direction for an organization and
guides resource utilization to accomplish goals with sustainable competitive
advantage” and then the aspects of organizational governance. Bénabou and Tirole
(2010) argue that there are three possible understandings of corporate social
responsibility: the adoption of a more long-term perspective, the delegated exercise of
philanthropy on behalf of stakeholders, and insider-initiated corporate philanthropy.
The latter two understandings build on individual social responsibility, which led us to
review individual motivations for prosocial behavior. Thus, although organizations
with a social purpose have existed for many years, they have recently received
increasing attention at a scholarly and governmental level (Dees, 2001; Leadbeater,
1997). In general terms, most of the articles on social entrepreneurship are based on
the description of the phenomenon (Choi & Majumdar, 2014). The aim of the paper is
to describe the importance of Entrepreneurial culture like the success factors of social
entrepreneurs.
942 Strategica 2016
People, profit, planet, and social business
First conceived by John Elkington in 1997, the triple bottom line or “People, Planet,
Profit” approach tried to bridge the gap between economic benefits (Profit) and non-
economic benefits (People and Planet), which appeared to be mutually exclusive in any
previous theory. Elkington’s concept recommended measuring profits not only in
terms of financial value but also in terms of other economic, social and environmental
denominations, collectively called ‘People, Planet and Profit’ (PPP). Social and
environmental entrepreneurs are concerned with people. They realize that for
business to play a role in sustainable development, there must be justice, equity, and
peace in their communities. They do not adhere to models of conducting business that
may exploit women, children, disabled people or ethnic minorities. In the last decades,
too many problems and scandals come from environmentally harmful production,
child labor, dangerous working environments and other inhumane conditions. Rather,
their business models are inclusive, and often involve community development
activities so that members can participate fully in the business, as well as improving
their livelihoods.
Conserving or restoring the environment is an equally important goal of social and
environmental entrepreneurs. Many innovative entrepreneurs have realized that there
are alternative models of conducting business that do not need to exploit the
environment to the point of depletion or destruction. Further, many entrepreneurs are
taking advantage of emerging new markets, such as ecosystem services,
environmentally responsible forestry and eco-tourism. Others have realized there can
be great wealth in waste, from opening recycling facilities, to producing a range of
products from materials, including alternative energy sources, clothing, and jewelry.
Social or environmental entrepreneurship is not incompatible with making a profit,
rather these enterprises are for ‘more-than-profit’ because they combine revenue-
generation with social and environmental benefits.
Figure 1. Social enterprises between profit, planet, and people (adapted by Elkington, 1997)
Fostering Entrepreneurship through CSR 943
“Social business,” as defined by Pr. Muhammad Yunus (2010), is business whose “goal
is to solve some of the social, economic, and environmental burdens that affect
humanity: hunger, lack of housing, health, pollution, ignorance…” Organizations
created for this purpose should in principle generate profits; however these profits, in
Pr.Yunus’ strict definition, are to be invested back. Social enterprises (figure 1) apply
business solutions to social problems. The ultimate goal is to achieve sustainability by
enabling non-profits to support themselves financially in innovative ways instead of
relying solely on grants and donations. Since there are no shareholders in a non-profit
organization, the profits from the related social enterprise are completely reinvested
in the work of the organization. The idea of Bill Drayton and Muhammad Yunus in
principle is simple, use the same market behaviors that are responsible for our own
three hundred year ascent in a pointed and purposeful way to create self-sustaining
enterprises and businesses that solve social issues (Austin & Stevenson, 2006).
The necessity of revenue-generating activities for non-profits has built a new operating
model where business principles, market ideas, and values co-exist and work with
traditional public sector values like responsiveness to society and following the public
interest. To be successful a social enterprise needs a good business model that includes
two basic elements:
- an operating strategy that includes all the stakeholders, internal organizational
structure and external partnerships that are crucial for creating the organization’s
image and reputation (Gazzola & Battistini, 2015);
- a resource strategy that analyzes the financial and human resources necessary for the
activities to be efficient.
The business model for a social enterprise permits to the social entrepreneur to
transform inputs into outcomes; the generation of both social value and economic
value. A social enterprise can be connected with the non-profit organization in one of
these ways:
- Coincident, when the enterprise and the social programs are only one and the
business is created for the clients and it is central to the mission.
- Integrated, when the business activities overlap with the social programs and his
business is created as a funding mechanism and to expand and improve the mission of
the organization.
- Outside, when social and business activities are separate and may or may not be
related to the mission of the organization and the business is created mainly as a
funding mechanism to finance social activities.
Moving from CSR to ISR
In spite of the varying definitions of social entrepreneurship, a common factor emerges
in almost every definition: the ‘problem-solving nature’ of a social entrepreneur is
significant, and the corresponding emphasis on developing and implementing
initiatives that produce measurable results in the form of changed social outcomes
and/or impacts (McLeod, 1996).
Muhammed Yunus defined a social business enterprise (SBE) as a business with
primarily social objectives, whose surpluses are principally reinvested in the business
or in the community rather than just accumulated as profits. The basic features of an
SBE are that it:
944 Strategica 2016
- Adopts the principle of benefit maximization rather than profit maximization,
- Operates without incurring losses while serving disadvantaged people and the planet
is nonetheless, serious about investing in expansion, innovation and increasing
productivity,
- Competes with profit maximizing enterprises as well as other SBEs for market
efficiency,
- Generates enough surplus to pay back the invested capital to the investors as early as
possible.
Social entrepreneurs play the role of change agents in the social sector by:
- Adopting a mission to create and sustain social value and not just private value,
- Recognizing and relentlessly pursuing new opportunities to follow the mission,
- Engaging in the process of continuous innovation, adaptation, and learning,
- Acting boldly without being limited by resources currently in hand,
- Exhibiting a heightened sense of accountability (Dees, 2001).
Social entrepreneurship is based on the social value creation process. Individual Social
Responsibility drives the social entrepreneurship. ISR promotes a proactive stance
towards positively influencing and affecting the people and environment in and
around one’s immediate circle (figure 2). ISR drive CSR (Gazzola & Colombo, 2015) as a
corporation is comprised of individuals and hence ISR determines the culture of social
responsibility, it creates. Individuals are increasingly becoming socially responsible
and thus, companies are required to become socially responsible for meeting demands.
Values are at the base of ISR and they help to both define the “core” of people and
explain, why people make sacrifices, who they are and what they are willing to give up
to attain their goals (Mitchell, 1971). For an organization, values serve to give a sense
of identity to its members, enhance the stability of its social system, direct manager’s
attention to important issues and guide their decisions (Deal & Kennedy, 1982). As
such, values are an essential part of a company’s overall culture, affecting many
important activities and relationships, such as competitive strategies, personnel
policies, and relationships with different stakeholder groups (Valentine & Barnett,
2003; Hunt, 1989).
An organization’s ethical values emanate from the personal predisposition of the
company’s leading manager or entrepreneur and as such influence their decisions and
lead to actions that are desirable to the organization (Shane & Venkataraman, 2009).
Values are the basis for defining the normative standards for the organization’s
members. They have consequences for the respective organization, including the
legitimization of entrepreneurial and managerial actions (Stevenson and Jarillo, 2007),
the quality of products, improved trust, a greater organizational commitment and
increased effectiveness due to a strengthened organizational culture (Engelbrecht, Van
Aswegen, & Theron, 2005). Besides, Peters & Waterman (1982) point out that firms
that show superior performance have a well-defined set of shared ethical values. In
this regard, values are necessarily and explicitly part of doing business (Freeman,
2004). In making this statement, Freeman rejects the thought that ethics and
economics can be separated sharply from each other and do not have anything in
common. Values are still too often seen as a counterbalance of the company’s profit
orientation, which in this regard almost seems to be objectionable (Jamshidinavid,
Pourmazaheri & Amiri, 2015).
Fostering Entrepreneurship through CSR 945
Entrepreneurial values are considered as “roots” of ethical bases that orient CSR
approaches of companies. In these companies, entrepreneurial values represent a
fundamental driving force of the CSR philosophy and stakeholder management
practices. They also lead to the adoption of CSR practices and related communication
tools.
Figure 2. Example of individual social responsibility (Portolese Dias, 2012)
Profit is not all that matters
The difference between the two kinds of entrepreneurs: profit oriented and social
oriented, is not only the motivation. If we compare the entrepreneurs spurred on by
money and social entrepreneurs driven by altruism there are more differences, they
have a different ISR. Both the entrepreneur and the social entrepreneur are strongly
motivated by the opportunity they identify, pursuing their vision and gaining
considerable psychic reward from the process of realizing their ideas. Regardless of
whether they operate within a market or a not-for-profit context, most entrepreneurs
are never fully compensated by money for the time, risk, effort, and capital that they
invested. It is possible to differentiate entrepreneur and social entrepreneur for the
values. For the entrepreneur money oriented the value proposition is organized for the
markets for creating financial profit. From the outset, the expectation is that the
entrepreneur and other investors will derive some personal financial gain. Profit is
necessary to maintain the equilibrium of the firm. The social entrepreneur is not
organized to create financial profit for the investors. The social entrepreneur follows
the values connected with the mission and with the society in general. Normally
entrepreneurial value proposition assumes a market with customers that are able to
pay for the innovation (Zhao, 2005).
The social entrepreneur’s value proposition is aimed at an underserved or highly
946 Strategica 2016
disadvantaged population that lacks the financial means. This does not mean that
social entrepreneurs cannot have the profit-making value propositions. Companies
created by social entrepreneurs can generate income, and they can be organized as
either not-for-profits or for-profits (figure 3), but what characterize the social
entrepreneurship is the primacy of social benefit.
Figure 3. Entrepreneur and social entrepreneur (Abu-Saifan, 2012)
Danone and Yunus: the social business enterprise (SBE)
Grameen Danone Foods Ltd. is a joint venture started as a ‘social business enterprise’
in 2006 after Muhammad Yunus, the founder of Grameen Bank (famous for pioneering
micro-credit), and Franck Riboud, the Chief Executive Officer of Danone, decided to
begin a business that would bring low-cost and highly nutritious food to the people of
Bangladesh. Together, Riboud and Yunus, in order to fight malnutrition, decided to
produce a fortified yogurt, the Shokti Doi, to improve the nutrition of poor children in
Bangladesh. The first micro-yoghurt factory was opened in Bogra in 2007. The joint
venture produces a yogurt enriched with crucial nutrients that it fulfilled the
nutritional needs of children in Bangladesh. Each 60 g cup of Shokti Doi brings
approximately 12.5% of RDA in Calcium and is fortified with 30% of RDA in Zinc, Iron,
Vitamin A and Iodine. The price is 6 BDT (= 0.06 EUR) which even the poorest can
afford. Grameen Danone Foods affects people's lives not only by improving their
health, they also agreed that the partnership should aim to improve the living
conditions of some of the poorest communities of Bangladesh by involving those
communities in the production, distribution, and sales of the yogurt.
Benefits exist along the whole value chain. The milk for the yogurt is purchased from a
co-operative of micro-farms, financed by Grameen, in the Bogra district. The
production is designed in such a way as to give as many people as possible a job. Once
the yogurt is produced, it is distributed in two ways: either to shops which have fridges
or cooling boxes or through ‘Grameen Danone Ladies’ a network of micro-
Fostering Entrepreneurship through CSR 947
entrepreneurs who are trained and coached by Grameen Danone staff. Sales ladies
distribute the yogurt door-to-door and receive a 10% provision. Unsold yogurts are
taken back. Danone provides the expertise in technical areas such as construction,
plant maintenance, and yogurt production, while Grameen brings their understanding
of the local environment together with their extensive networks.
In total, Grameen Danone Foods is responsible for the creation of about 1,600 jobs
within a 30km radius around the plant. There is also an environmental aspect: solar
energy is used for heating up the water that is used for cleaning the installation and
preheating water for the main boilers. In addition, the packaging of the yogurt is fully
biodegradable. Therefore Grameen Danone Foods contributes to the achievement of
the Millennium Development Goals by the United Nations to end poverty. The benefits
are multiple: the yogurt is highly nutritious, improving the health and nutrition of
children in some of the poorest areas of Bangladesh; the yoghurt is manufactured from
products that are locally sourced, thereby providing a source of income for local farms;
and Danone Grameen plan to build up to 50 plants by 2020.
Conclusion
In the globalization period it is important not only what customers buy but also how
the goods and services they buy have been produced. All organizations aiming at long-
term profitability and credibility are starting to realize that they must act in
accordance with social and environmental need (Gazzola & Mella, 2015). The
environmental and social innovations that are emerging today are being met with both
enthusiasm and skepticism. It can be a promise of a better tomorrow, but the risk
could be a cosmetic overlay, a “social greenwashing” of sorts, that will basically change
nothing. However, while this debate is far from settled, some answers are emerging
already and probably the best way to tackle the issue is to take a close look on the
social business enterprises and learn from their experience.
Today, social business is the new frontier, in that it combines an ambition for
development and the conquest of new markets. Environmental and social innovations
can become the levers of a transformation of companies, not only improving their
performance but also contributing to the invention of a new, more sustainable and
more inclusive economy. The example of Grameen Danone provides a concrete
framework to study the initiatives taken by multinational companies from first-world
countries to address the low-income populations from emerging countries. In this
article, we argue that entrepreneurial personal values are essential for creating
sustainable economic and financial value because only those organizations, which are
able to import values and appreciate the relationships with their stakeholders, will be
successful in the future. There is no sustainable world without sustainable people.
Individuals are nuanced in their assessment of the factors underlying their choices.
One cannot simply accept that they will respond positively to “doing good”; it must be
good for them in their role entrepreneur. In addition, it is impossible to speak of
corporate social responsibility without understanding that for companies to be socially
responsible are necessary socially responsible individuals in their various roles. Hence,
it not possible to expect CSR without ISR.
948 Strategica 2016
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Fostering Entrepreneurship through CSR 951
FOSTERING SUSTAINABLE DEVELOPMENT, ENTREPRENEURSHIP,
AND SOCIAL INNOVATION THROUGH CSR: THE NEW ROLE OF
UNIVERSITY
Cristina MITITELU
University of Rome Tor Vergata
2 Via Columbia, 00133 Rome, Italy
mititelu@economia.uniroma2.it
Gloria FIORANI
University of Rome Tor Vergata
2 Via Columbia, 00133 Rome, Italy
fiorani@economia.uniroma2.it
Irene LITARDI
University of Rome Tor Vergata
2 Via Columbia, 00133 Rome, Italy
litardi@economia.uniroma2.it
Abstract. Sustainable development is a global objective to overcome the economic,
environment and society crises worldwide. The paper aims to explore the proactive and
dynamic model of the university’s education system, focusing on the new role played by
the School of Economics in the promotion of economic, social and environmental
sustainability, and how this goes beyond, in stimulating bottom –up social
entrepreneurship ideas through students engagement. The research is based on 1) an
analysis of the importance of education in fostering social development and
entrepreneurship; 2) descriptive analysis of innovative laboratories modules, by
exploring and mapping the best project proposals initiated by the students; 3) a case
study analysis on waste management (UniRecycling) project, scaling up objectives,
stakeholder mapping, activities and the expected results. The findings show the new role
played by School of Economics, along with other partner institutions, in stimulating the
student’s engagement in workshops that enable the transfer of knowledge, skills and self
– development. The model is based on a dynamic bottom-up model of learning and
dissemination of sustainable and entrepreneurial ideas, that aims (1) to sensitize
students to be active and create project ideas for social and environmental
entrepreneurship, defining a first learning experience with the profile of ‘local ethical
promoters’; (2) build and strengthen the local territorial networks, to contribute to the
creation of a system of services attentive to responsible and sustainable entrepreneurial
development.
Keywords: education; sustainable development; Third Mission; sustainable projects;
social entrepreneurship.
952 Strategica 2016
Introduction
On September 2015, the United Nations formally adopted a new sustainable
development agenda, the 2030 Agenda for Sustainable Development, including a set of
goals, called the Sustainable Development Goals – SDGs. These are the most significant
and unprecedented global commitment to eradicate poverty, improve the quality of
people’s lives, ensure environmental sustainability, provide inclusively and equitable
quality education opportunities for all, building sustainable partnerships and so on.
The sustainability has become a priority and is increasingly playing a role in the
strategic choices of all actors, which look for economic, social and environmental
sustainability and shared value creation (Porter & Kramer, 2011) in order to preserve
well-being for future generations.
A major instrument to develop a smart, sustainable and integrated growth (European
Strategy 2020) is through quality education able to promote inclusively and equitable
learning opportunities (SDG; Rio+20), specifically on sensitive issues such as social
responsibility, social entrepreneurship and sustainable innovation, so that all citizens
can acquire and develop competencies and professional skills needed to promote their
employability, active citizenship, and intercultural dialogue. Education is an essential
tool for achieving awareness about the environment, ethics, and values and also
strengthens the attitudes and skills needed for sustainable development and active
participation in the decision-making (United Nations, Agenda 21 Ch. 36, 1992).
The research aims to develop a conceptual framework linking the idea of quality
education to social entrepreneurship, stressing that a path towards a more oriented
approach encompassing dialogue, shared knowledge- skills- behaviors and values
among different actors, are overall conducive to fostering collaborative,
entrepreneurial and innovative ideas for sustainable growth. The objective of the
research is to explore the University’s curricula, with topics such as CSR and SDGs. In
addition, it analyses the faculty’s experience on how linking education to the territory
to stimulate sustainable development. In particular, the role played by the School of
Economics in the promotion of economic, social and environmental sustainability, and
how this goes beyond, in stimulating bottom–up social entrepreneurship ideas through
student’s engagement.
The research embodies:
1) an analysis of the role of education, supported by the international strategies, in
fostering social development and entrepreneurship and as well, the rising need for
stimulating cohesion on the sustainability issues, including youth, public and private
businesses and third sector organizations;
2) a descriptive analysis of innovative training modules (education+Action), namely
the Labs of the New Economy, by exploring and mapping the best project proposals
initiated by the students;
3) a case project analysis on waste management (UniRecycling), scaling up objectives,
stakeholder mapping, activities and the expected results. Primary data were collected
by questionnaire to the university campus beneficiaries, using lime survey platform, to
test and gather their real perceptions on the project.
The findings show the new role played by School of Economics, along with other
partner institutions, in stimulating the student’s engagement in workshops that enable
Fostering Entrepreneurship through CSR 953
the transfer of knowledge, skills and self – development. The model is based on a
dynamic bottom-up model of learning and dissemination of sustainable and
entrepreneurial ideas. The labs aims (1) to sensitize students to be active and develop
project ideas to promote social and environmental entrepreneurship, defining a first
learning experience with the profile of ‘local ethical promoters’, (2) build and
strengthen the local territorial networks, to contribute to the creation of a system of
services attentive to responsible and sustainable entrepreneurial development.
Education: Linking sustainable development to social entrepreneurship
This research aims to map the initiatives relevant to sustainable development,
entrepreneurship and social innovation at the level of higher –education. This nexus
between the three fields is becoming particularly relevant and is supported by the
university policies and strategies increasingly oriented to corporate social
responsibility (CSR) and sustainability.
Some changes of particular impact are to be observed:
- At the international level, Lisbon agenda with its focus on the quality of life for
European citizens requires that businesses are increasingly reconciling sustainability
aspects with innovation and entrepreneurs. Sustainability requires incremental
change, and the role of the entrepreneur is critical to its success.
- The education plays an important economic sector, accounting 6.1% of OECD
countries’ GDP (OECD, 2014). The education plays a significant role in shaping
behavioral attitudes and skills– from the primary level up. It plays a central role to
provide the entrepreneurial skills building, mix of experiential learning, and mindset
shift. This attitude is reinforced at the university level, because the globalization and
the technological development have completely changed the nature of work, and its
role is not more just only focusing on ensuring students secured future jobs – but also
to become entrepreneurs. Therefore, it is no longer enough to train students for a
career but to give them the necessary entrepreneurial skill to increase competition and
innovation in the market.
- At the micro level, the local actors as the University play a significant role. The “Third
Mission” refers to a set of activities by which the University triggers processes of direct
interaction with civil society and businesses, with the aim of promoting the growth of
the territory. Therefore, the knowledge becomes instrumental for attaining output
production (Novelli & Talamo, 2014). The universities are nowadays acquiring new
responsibilities and managerial transformations: from merely being entities for
knowledge creation and dissemination, they have evolved to increasingly play an
entrepreneurial role, where networking and collaboration, as well as sustainability, are
crucial (OECD, 2012).
- The link between the University and job market allows that businesses and civil
society find in the territory the needed knowledge and skills, ensuring sufficient
guidance to young people entering the workforce. In this context, the linking between
“science” and “society” encourages dialogue and networks that opens much more
space to innovation and sustainable development, though harmonizing inter-
disciplinary skills and expertise.
In particular, there is also need to consider the advocacy and promotion of sustainable
development in the phases of education, namely, the formal, and the non-formal. It
would require strategies beyond a university based learning program for Corporate
Social Responsibility, requesting a much wider set of stakeholders to be engaged with
954 Strategica 2016
and to be mobilized. Such shift is supported already by the growing relationship
between university-industry-government (Etzkowitz, 1993; Etzkowitz & Leydesdorff,
1995). The following relationship requires a balanced configuration of “three-helix” for
the transition to a knowledge society, in which the university and other institutions
collaborates with the industry and government, also by implementing joint initiatives
(Etzkowitz & Leydesdorff, 2000), for sustainable socio-economic development. “Triple
Helix” model considers that the potential for innovation and economic development, in
a knowledge society is mostly based on the role played by the University and the
hybridization of the elements resulting from the relationship between universities,
industry and government in order to generate new formats of institutional and social
production, transfer and application of knowledge (Ranga & Etzkowitz, 2013).
Therefore, the university plays a critical role in the physical space of encounter
between academia, civil society, for-profit and non-profit organization and PA. The
first step in creating a university of the future is to ensure that the institution
establishes a relationship with the community, stimulating social empowerment from
the bottom. According to the newly renewed mission (Third Mission) it has the power
to form networks between institutional and private actors in the territory and creating
a virtuous circle for the social and economic development. A “regional hub” that
triggers engagement of students and citizens, NGOs, businesses and governments in
economic, social and environmental issues.
On a general note, should be underlined the lack of strong ties between universities,
institutions, businesses, and territory. However, there are increasingly present
fragmented initiatives with more innovative learning approaches that enable
sustainable and entrepreneurial efforts worth noting at the faculty level.
University of Tor Vergata: School of Economics & CSR Labs
The new role of the University shows its managerial responsibilities of increased
engagement with other local actors in creative networks of collaboration to change
learning and stimulate social entrepreneurship and innovation. The new mission of the
University of Tor Vergata, aside to contribute to people’s education and training, to
scientific research and technological, organizational and social innovation needed to
achieve the SDGs approved by the UN, it aims to be a real promoter of the territorial
sustainability and to straightening the collaboration with the private and public
sector, third sector organization and investors, at national and international level.
From 2014, was released a Sustainability Plan, including the actions required to reduce
long-term negative externalities - with particular reference to greenhouse gas
emissions - generated by the University actions. More recently, in February 2016, in
collaboration with the Unipolis Foundation, proposed the creation of the Italian
Alliance for Development Sustainable (ASviS) with the intent to grow the awareness on
the importance of the issues addressed in Agenda of Global Sustainable Development
2030.
The School of Economics is located in the VI District at outskirts of Rome. The area
presents several problems, such as social deprivation, poverty, and micro-criminality, a
small degree of education, unemployment, racial inclusion, and security (Fiorani,
Fostering Entrepreneurship through CSR 955
Litardi & Mititelu, 2015). Main trends visible over the past years undertook at the level
of academia, and structural changes in the School of Economics are linked to:
- From the edition 2009-2010 onwards: integrated comprehensive set of CSR and social
reporting courses into bachelor and master’s level programs. The faculty structured
the course program based on an innovative approach that combines theories, case
studies and group works and business professional’s testimonials. To a great extent, it
aims to strengthen the contact between universities and institutions associations-
companies in the territory, also in anticipation of subsequent placements of the
students. Fiorani et al. (2015) noted that a primary trend on CSR programs attendance,
between 2013 to 2015, shows the following interesting data: 30% of students
attending the CSR exam, subsequently discussed a CSR final thesis, and some are
winners of national awards for “Best thesis on sustainability”. On the other hand, 25%
considered that the thesis project in CSR was helpful in overcoming the job interview.
Also, 63% of respondents currently are employed, and 42% found a job within six
months of graduation especially in the for-profit sector (about 63%). The less
enthusiastic data are those related to the job role in CSR or sustainability activities. The
results show that 94% of students have a medium- high average satisfaction with the
course, also confirmed by the increasing number of taken exams (40 students Erasmus
out of 200 students).
- From the edition 2014-2015 onwards: has been integrated the CSR Labs as part of the
CSR programs of activities. Therefore, in collaboration and support of the Commune of
Rome/VI Municipality, Lazio Region and Next-New Economy for all, has been
activated extra-training activities called “Laboratories for the New Economy -
Preparing for the Future”, also open to students from other campus faculties. The Labs
have been designed in collaboration with the “IInd edition Exhibition on CSR and Social
Innovation” and the Oscars of Sustainability, a competition for the innovative ideas
among youth. The main aim of the initiative, defined, for its characteristics, as
“FormAction” (education +action), is to stimulate the student’s self-entrepreneurship
and the grassroots mobilization, enable meetings, and create synergies between local
entrepreneurs and creative young students. The expected results are to straighten a
hub of creative ideas among students, support forms of self-employment and social
innovation and raise awareness among students about environmental issues and
sustainability. This new approach raises student’s awareness with a new kind of self-
responsibility, rethinking their role in society, rethink their needs and how they can use
tools and resources to answer the needs of a more sustainable territory.
In practice, the Labs stimulate teamwork skills to enable project ideas co-design (work
groups), motivation, dedication and entrepreneurial thinking to provide social,
environmental and economic development by a) starting from experiences already
realized or b) identifying new needs to be answered with concrete and innovative
proposals (stimulation of self- entrepreneurship). The workshop program, structured
on several meetings, gives students support through training and resources and guides
them towards the co-design of project proposals. The project work developed consist
of a structured formularies compilation that enables students to brainstorm for
creating an integrated proposal from the initial idea and objectives, defining and
classifying stakeholder, to activities and management of the resources.
The main strategic aims of the labs, focused on three main dimensions:
- Sustainable development in the environmental and social context, to be replicable in
the territory;
956 Strategica 2016
- Realization of video story-telling of a best practice sustainable company;
- Design and co-implementation of ethical and sustainable initiatives (e.g. Ethical Cash
Mob).
Both editions of the “Labs for the New Economy” showed a significant number of
participation in seminars and workshops: 120 students (Ist ed.) and 200 students (IInd
ed.). In the Isted. Lab’s attended mostly by men (56%) of average age 25 years from the
School of Economics, Law, and Social Sciences were produced around 21 projects. In
the IInd ed of the ‘Oscars for sustainability’ exhibition, and Lab’s collected proposals,
the project ideas submitted were 26, distributed as follows:
- Sustainable territorial development (22 project ideas)
- Storytelling of a sustainable business (2 projects);
- Ethical events cash mob (2 projects actively implemented).
Table 1. First Prize Cash mob at Social Innovation Awards (Ist ed. & IInd ed.)
Title of the project
Ist Ethical Cash Mob for MOBilitation in the territory, named “RiCompriamoci il
Edition future/ Cash Mob_ Let’s buy our future”; implemented at the outskirts of Rome,
aiming to “voting with the portfolio”, for the fair trade products of Altromercato
and the first sustainable supermarket of Lazio, Simply Market.
IInd Ethical Cash Mob for ‘World Fairtrade challenge’: purchase campaign on Fairtrade
Edition Coffee to support farmers in their struggle against the effects of climate change &
the Ethical Cash Mob “Christmas Gifts” at “Le Artigiane” (“The Craft”) in Rome (to
support Female Made in Italy and recycling waste materials)
The table (Table 1) shows the first prize awarded projects. The first edition awarded 2
out of 3 Oscar’s of Sustainability to the projects developed by the students of
University of Tor Vergata. While, the second edition, awarded 3 out of 3 Oscar’s to the
projects developed by the students of University of Tor Vergata.
In both editions, more than a third of the projects presented in the final stage of the
labs were designed proposals to be undertaken for concrete project implementation.
The themes of the projects are covering a broad range of interesting areas, for the
protection and management of the commons goods, cultural initiatives, social inclusion
and regeneration, to activities of critical and responsible consumption and so on. The
plans are related to the furniture of articles with recycled materials, commercial
activity of organic products, activities of “cash-mob”, the app on “Made in Italy”, waste
management at the university level (e.g. UniRecycling), Rebottle and so on. Regarding
the entrepreneurial proposals probably most significant are those related to
‘sustainable development of the territory’ and dealing with recycling management (e.g.
UniRecycling, ReBottle) agriculture sustainability (e.g. OrTor), transportation (Car
Pooling) and so forth.
Fostering Entrepreneurship through CSR 957
Table 2. Mapping social entrepreneurial project proposals
UniRecycling OrTor ReBottle Car Pooling
Main - an innovative - create a mobile - recycling of - an innovative
objectives idea to solve the platform that aims to municipal waste, mobility idea that
problem of plastic solve the problem such as glass and allows users to
bottles recycling related to the the consumption- protect the
and the creation of imitation of Italian saving of electric environment
a compactor to food brand ‘Made in energy for (reduction of traffic,
reduce the Italy.' domestic use CO2, and costs).
pollution; - provide a service to (kwh). - to use one car with
- give incentives “foreigners” that buy - to create a value several people on
for the behavior of typical Italian chain that has as board, to make the
recycling to products, and poorly final result the same journey.
students, teachers informed on certified creation of lamps
and so on; food made from
recycled glass
bottles (LED
lamps)
Expected - sensitize, - reduces transaction - design the - communication
Results communicate and costs for purchase, product and adhesion to the
increase and sustainability development and service: around 400
awareness (user on the long term. creation adhesions to “I use
guide, social - communication and -website the CAR-POOLING
media, crowd- events of promotion: development Tor Vergata.”
funding and so on) cuisine, food and - dissemination of -organization of an
- purchase culture, promotion of information on event
compactor & the service App practices adopted
achieve a high Made in Italy -use social
number of platforms to
compacted bottles sensitize the
- kg of plastic sold community
by the university
for disposal
cooperatives
- benefits for users
An ad-hoc survey findings submitted to the participants in the final stage of the Lab I
ed. shows that there is a general appreciation of the path attended: the participants
assessment recognized an average mark rather high, not below 3 (on a scale from 0 to
5), in achieving different project aspects (e.g. content, coordination and learning). More
than 58% recognized an increased knowledge in the field of CSR and sustainability
after such activities. The assessment on the techniques transfer to enable self-
entrepreneurship, co-design idea evaluation and development of autonomous critical
skills and choice, show rather low results.
Case study: UniRecycling
The project proposal starts from the idea that today’s social dynamics require
increasing attention around the reuse of materials, as well as a more rational use of
available resources. Among the different objectives promoted by the Sustainability
Plan in 2020 of the University is the improvement of waste management - aimed at
raising awareness of the academic world to the sustainable recycling collection. The
project starts from the need to find solutions to eliminate or improve the status–quo of
the waste management in the campus.
958 Strategica 2016
More in depth, at local context, the recycling issue is a critical point, which is worsened
by the faculty’s limited economic resources as well as, institution’s lack of interest in
recycling. Students, staff, and teachers do pay little attention to waste collection
management, and such behavior may be determined by the lack of tools (no bins for
recycling), which should be made available by the faculty.
Therefore, the foundation of this proposal idea relies on few determinants that also
define the general and specific objectives of the project:
- Waste differentiation is a critical starting point for its effective management;
- General objectives: to transmit a genuine cultural orientation towards sustainable
behaviour, with the help of the direct incentives; to create a system of waste
management for the plastic and aluminum cans; also, to stimulate an alliance at
campus level, motivated by the desire to work for progressively reducing pollution and
creating a sustainable environment.
- Specific objectives: the need to identify a strategic point, accessible to the greatest
number of people, for an incentive recycler for the plastic and aluminum cans and to
generate benefits for all stakeholders. A win-win approach that enables those who
enter PET bottles or aluminum cans to turn the waste into real “resource”, and get a
voucher to be used in commercial businesses.
The main stakeholders of the project are various, ranging from the professors, staff, and
students to external members. It is expected that once the results are achieved, there
would be the possibility of extending the initiative to all the other public and private
institutions. By stakeholder are understood “those who can influence the achievement
of the objectives of an organization, or those who are affected by the attainment of
those goals” (Freeman & Reed, 1983). The following figure shows the primary
stakeholders identified. The partnership involves the participation of:
- Universities (as promoters, investors, and final beneficiary)
- Students and professors (active recipients)
- Ecolife and Eurven (machinery suppliers)
- Businesses involved in the project (bars, restaurants and so on).
Figure 1. Stakeholder mapping
The main project activities require analysis, in a first initial stage, of the leading
businesses dealing with the distribution of recyclers operating in the area. The
companies manufacturers of compactors identified to be contacted were Life Italy Srl
or Eurven Srl. In a second stage, the availability of the university leaders to promote
Fostering Entrepreneurship through CSR 959
and support UniRecycling project is undertaken. Once the financial resources
identified and recycling point has been settled, a third stage will consist in the
inaugural event of the project. Finally, it is expected to sell the collected plastics
periodically in a consortium, with the aim to extend the project with a future
prospectus of self-financing.
The project financing methodological approach adopted is the crowd-funding. An
analysis of the main best-existing platforms of crowd-funding (Kleemann, Voß &
Rieder, 2008; Lawton & Marom, 2013) at national and international level was
performed. The priority regarding fundraising will be supported by an initiative of
crowd-funding through EPPELA platform.
Regarding the sustainability of the project, it is considered that is directly related to the
responsible behavior of those involved and to the attainment of the objectives set
regarding recycling. It is strictly linked also to the expected results of the material
purchased by the Corepla consortium, and to what degree this will enable to installing
other compactors.
The main activities to promote awareness are:
- Straightening the network of collaboration around the project that is critical for its
sustainable success and the creation of shared value for the entire community.
- Recycling-day: organized in the event of the compactor installation aimed to explain
the benefits of its operation.
- Social media strategy to sensitize the stakeholders, mainly students; created a
Facebook page, followed by 500 fans in less than a week and a LinkedIn professional
profile which reached a considerable number of followers; the use of traditional
advertising media, such as posters and leaflets, and the word of mouth to advertising
the policy: zero impact.
Figure 2. Facebook page of the UniRecycling
The project expected results are to:
- Increase the efficiency of recycling plastics, with the aim of raising awareness and
actively involve about 50% of the students and university staff;
- Support a win-win gain among the parties concerned;
- Reduction of CO2; every bottle that is recycled generates a progressive improvement
of the environmental conditions, extensible to the surrounding community. It is
960 Strategica 2016
estimated that every kg of recycled plastic (approximately 35 bottles of 0.5 L) saves 1.5
kilograms of CO2.
Key findings from the survey
The online survey checked the availability for the academic community to finance the
launch of such project and the motivation related to their donation. There have been
completed 201 questionnaires; about half completed by both sexes (respectively 51%
males and 49% women). Approximately 79% of the academic community has shown
its propensity to support the launch of the project financially, with 175 favorable
responses - while only 28 responses have expressed dissent. It is surprising the
approval got for the project; 54% of the responses shows that the credibility of the
project is the primary motivation for donation, followed by moral rationales with 22%,
and economic benefits, with just 11% of the replies.
54
22
11 13
possibility to credibility of the moral motivation other
obtain future project to environmental
economic sustianability
benefits
Figure 3. Motivation of the participants for UniRecycling
To confirm these percentages are also the feedback received on the actual economic
propensity of the donors. As shown in the next figure, the majority of respondents (93
responses, 42% of the total) would donate 5 to 10 euro to such initiative while from 2
to 5 euro was confirmed by 56 replies, equivalent to 25% of the total. At most extreme
limits are those who would donate 1 or 2 euros (32 replies) and between 10 and 20
euros (16 answers). Relatively small are however donations exceeding 20 euros, with
just nine donors willing to donate such sums.
more than 20 euro 9
10-20 euro 16
5-10 euro 93
2-5 euro 56
1-2 euros 32
0 20 40 60 80 100
Figure 4. Economic availability for financing UniRecycling
Fostering Entrepreneurship through CSR 961
Conclusions
A structured and organic CSR training course offer, aimed to provide skills for future
managers and strengthen the connection between universities and
institutions/organizations/businesses in the territory, according to “Third Mission” is
ongoing and further efforts are needed. The CSR Labs undertaken at the School of
Economics enabled the process to foster several social entrepreneurship and social
innovation proposal ideas, through a bottom-up model of teamwork learning, training,
and skills dissemination. The results, over the past two years, brought several positive
implications. It raised dialogue and collaboration on several sustainability topics
among students, stimulating their self-awareness on the real problems of their
territory. It encouraged students to overcome the bridge to local development through
entrepreneurial thinking. The innovative projects proposal created, required the
engagement of group work students, sometimes along with the public and private
institutions, and third sector organizations in meaningful projects of local
development. It supported the dissemination of social entrepreneurial skills needed
for a CSR project manager and bench learning on the territory development.
The dynamism created around the innovative changes to improving the campus are
worth nothing, seeing the preliminary analysis of the project proposal UniRecycling.
The idea was met with enthusiasm by potential users, as confirmed by data on the use
of an incentive compactor and shows the sensitivity to environmental issues and waste
management. About 66% of the students surveyed stressed its importance and about
98% confirmed their active participation in the project. The initiative is a first initial
stage of testing a project proposal in the territory and opens channels to concrete
debate and evaluation of the most suitable modes for inserting such project in the
University campus.
The projects analyzed shows how important is the collaboration and engagement of
the various stakeholders to reach the expected results, providing contexts that
stimulate government, industry, university and civil society to work together, sharing
ideas to co-create the future, in a perspective of shared value creation. The main
challenges encountered at the University project co-design and implementation should
be noted in the lack of a coordination point for sustainable activities and the need to
improve the visibility and long-term strategies. Secondly, taking into consideration the
limited resources, it is highly advisable the collaboration of the several faculties into
the campus and the participation of their students, to stimulate a cross-fertilization of
entrepreneurial ideas that answers the entire university campus needs. Last but not
least, a more focused CSR program dedicated to stimulating ideas and concrete
proposal of start-up and social entrepreneurial incubators to enable innovative
interaction with the public and private actors could push an efficient, sustainable
agenda implementation forwards.
962 Strategica 2016
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Fostering Entrepreneurship through CSR 963
SMES AND SOCIAL RESPONSIBILITY: DOES FIRM AGE MATTER?
Alina BADULESCU
University of Oradea
1 University St., 410087, Oradea, Romania
abadulescu@uoradea.ro
Daniel BADULESCU
University of Oradea
1 University St., 410087, Oradea, Romania
dbadulescu@uoradea.ro
Tomina SAVEANU
University of Oradea
1 University St., 410087, Oradea, Romania
tsaveanu@uoradea.ro
Roxana HATOS
University of Oradea
1 University St., 410087, Oradea, Romania
rhatos@uoradea.ro
Abstract. Corporate Social Responsibility is a well-established concept, covering a wide
range of actions practiced for many years in western countries; at European level, social
responsibility is a philosophy, a way of ethic and responsible behavior which covers all
aspects of the relationship with own employees, clients, shareholders, stakeholders, local
communities. However, in Romania, the concept of social responsibility has emerged after
1990, along with the set-up of many NGOs and the entrance of multinational companies.
After 2000, many other Romanian business companies, both large and SMEs, started to
involve in actions of social responsibility, especially for improving the environment,
adopting social measures for employees etc. The main purpose of our paper is to
investigate practices and actions related to social responsibility, which are undertaken by
SMEs, and to reveal which factors really matter in determining different degrees of
involvement in CSR actions. Nevertheless, the level of social responsibility actions
undertaken by SMEs often depend on the decisions of their managers and the value
orientation of the entrepreneur seems one of the most prominent factors driving CSR
actions. However, the younger a firm the less likely it is that it gets involved in CSR. In this
paper, we investigate the relationship between the firms’ age and the level of their social
involvement. We expect to find out that young ventures display a weaker propensity to
get involved in social responsibility actions. In order to validate this hypothesis, we use
survey data collected during July – September 2014, from 48 SMEs operating in Oradea,
Romania. Our findings reveal that there are significant differences between newly
964 Strategica 2016
established ventures and those with a longer history in several directions related to their
CSR profile. Managers of young firms are more inclined to consider that producing social
welfare is the sole responsibility of government, and therefore the firms they own and
themselves are significantly less involved in CSR actions. Nevertheless, our conclusions
based on both theoretical synthesis and our analysis suggest that including business
ethics and social responsibility related aspects in educational programs for
entrepreneurship would reinforce such approach on behalf of new firms. A strategic
approach to CSR from the beginning of the activity of a company is likely to improve the
impact of such initiatives on the community and contribute to deeper and earlier
involvement of SMEs in social responsibility actions.
Keywords: CSR; SMEs; entrepreneurship; firm’s age; survey; Oradea; Romania.
Introduction
Last decades have witnessed dramatic changes in the relations between the private
sector, public authority, and civil society. Companies were challenged not only by the
major processes occurred at the end of the twentieth century, such as globalization,
deregulation, and privatization, but also by the society’s expectations regarding firms’
contribution to the public welfare and social involvement. Although this social
involvement has existed since the beginning of the capitalist organization, its
comprehension was rather in philanthropic terms, in a paternalistic and responsive
framework. However, nowadays, the theory and practice of companies’ social
involvement speak about models, rights, obligations and behaviors of the companies
within the society.
All these realities, together with the increasing dynamism of contemporary societies,
have run to a new approach regarding Corporate Social Responsibility (CSR). Through
CSR, companies have admitted that their role and impact on the economy and society
can no longer reside only in seeking profit and gaining market shares, and they have a
responsibility in social and environmental issues (Szegedi, Fülöp & Bereczk, 2016).
Moreover, the inclusion of these concerns in business strategies could be crucial in
ensuring the long-term success of these companies. According to Rochlin and
Christoffer (2000), CSR has gained importance due to globalization and increased
competition, to amplified size and influence of multinational corporations, while
restricting and redefining the state’s role in economy and society, increasing the
activism of civil society at the national and global level, and the growing importance of
creative activities.
Gradually, large companies started to implement CSR processes such as public
commitments to comply the standards, community investments, conforming and
fostering stakeholder’s involvement, and systematic public reporting on social and
environmental performance. CSR has long passed, theoretically and practically alike,
the area of philanthropy, money donations and charity actions. CSR has become an
active way to include the interests of stakeholders, a way to keep the competitive
advantage, to reconcile the profit’s objective with long-term strategies. The natural
consequence was that CSR has become an object of study, public debates, and political
actions, but also a matter of governance in most of the world’s economies, in regional
and global organizations. According to Zadek, Pruzan and Evans (1997) the shaping of
Fostering Entrepreneurship through CSR 965
CSR started from redefining values, continued with strategies, and was adjusted for the
effect of the public pressure.
Social responsibility: from MNEs to SMEs
Defining CSR is not an easy task, the approaches are various and, sometimes,
controversial (Vo, 2011, p.89). Moreover, excessive use of the acronym CSR instead of
the complete and actual term "corporate social responsibility" is not only exaggerated,
but it indicates that the meaning and its intrinsic value are neglected or approximate
(Roberts, 2003; Fischer, 2004). According to Castka et al. (2004), there are also
overlaps and confusions with similar terms and definitions used in related fields, such
as corporate sustainability, corporate social performance (Clarkson, 1995) or
corporate social responsiveness (Arlow & Gannon, 1982), corporate citizenship
(Matten & Crane, 2005), triple bottom line or social responsible behavior. As Dahlsrud
(2006, p.6) underlined “the challenge for business is not so much to define CSR, as it is
to understand how CSR is socially constructed in a specific context and how to take this
into account when business strategies are developed”.
The most frequent approaches on CSR refer to the efforts of the organizations to find
an equilibrium between economic, environmental, social and legal requirements, to get
involved and consider the stakeholders, and to get community something in return
(Goessling & Vocht, 2007), a way of being for the firm (Gazzola & Mella, 2006, p.19).
Jones (2005) approaches CSR through the stakeholder theory: either a voluntary
engagement of the management toward the thirds/stakeholders, either as a business
behavior considering that voluntary compliance to these principles and the
involvement of employees, customers, suppliers, communities, brings additional
benefits to the firm (Longo, Mura & Bonoli, 2005; Vo, 2011).
According to International Organisation for Standardization (2016), the purpose of
social responsibility is ”to contribute to sustainable development, to take into account
the expectations of stakeholders, to be in compliance with applicable law and
consistent with international norms of behavior, and to integrate all of this throughout
the organization and practice it in all its relationships”. United Nations Organization
consider that companies have to manage their operations so they ensure the economic
growth and competitiveness in the same time with voluntary actions for
environmental protection and promoting social responsibility (Aston & Anca, 2011),
while European Commission defined social responsibility as “the responsibility of
companies for their impact on society” (European Commission, 2016).
Certainly, the term CSR directly refers to the activity of large, multinational
corporations, but there are opinions considering that the term could be extended to
other businesses, regardless of size, origin or objectives of the involved stakeholders.
Thus, this shift and broadening of the CSR’s meanings started just from the concerns
regarding the environment, quality of the social relations, business performance and
increasing the influence of stakeholders over the small business behavior. Conversely,
there was also a conscious approach of the SMEs managers to comply with the
standards imposed by the responsible business governance, to voluntary incorporate
the principles of CSR in daily business (Jenkins, 2006; Spence, 2007; Sweeney, 2007;
Olaru, Stoleriu & Şandru, 2011).
966 Strategica 2016
Intuitively, SMEs are reluctant to be involved in SR actions, due to their small size and
lack of significant human and financial resources (compared to multi-national
enterprises - MNEs). Add to this the instability of the business environment, which
excessively focus SMEs on survival and short-term actions to the detriment of long-
term plans, lack of know-how (or know-who) to integrate SR in daily business, lack of
confidence in obtaining immediate and tangible results, difficulty in measuring the
intangible benefits and others (Aston & Anca, 2011; Zbuchea & Lazăr, 2010).
On the other hand, unlike large companies, SMEs do not seek formal social responsible
behavior; they are better placed in the social environment than MNE and, thus, could
achieve results with less effort and more "natural" than large companies could. SMEs
have fewer employees, and therefore the spread of this kind of culture is easier; they
are more flexible and can identify and respond more quickly to new ideas from the
society. In fact, many SMEs’ actions are already socially or environmentally responsible
(Obrad, Petcu, Ghergheş & Suciu, 2011). Therefore, beyond the re-definition, in formal
terms, of what they currently do, it could maximize the impact of existing practices in
business, the awareness of the benefits of social responsibility (SR) actions among
employees and customers, even the positive effects might take a while to manifest.
There are also opportunities and challenges for a responsible entrepreneurial activity
of SMEs. CSR could become a key competitive advantage in providing profitable and
long-term contracts with large multinational companies. From the point of view of
large businesses, the reasons to outsource much of the production and/or operational
processes require that selected suppliers and subcontractors to observe equally
responsible behavior, to identify and mitigated negative social and environmental
impacts.
Social responsibility and SMEs
In terms of organization and planning, the CSR activities in SMEs are mainly treated as
an ad hoc issue (Jenkins, 2006; Zbuchea & Lazăr, 2010), they do not fundamentally
define the job description of a certain person, being in charge of the manager / owner
or an experienced staff member (Sweeney, 2007; Vo, 2011). In most cases, CSR
activities in SMEs are linked to the local community, regarded as the most important
stakeholder (Longo, Mura & Bonoli, 2005; Besser & Miller, 2001), through community
projects and environmental initiatives (volunteer, charitable donations, recycling
initiatives) (Jenkins, 2006; Longo, Mura, & Bonoli, 2005; Sweeney, 2007). For SMEs,
the social responsibility means the company’s involvement in solving problems and
expectations of the local community: supporting local events, creating jobs, economic
growth, training and spin-off effects (Jenkins, 2006; Wennekers & Thurik, 1999), or
best practices and models for younger generations and potential local entrepreneurs.
There are opinions that all these engagements are in fact typical SMEs’ objectives and
results, and should not be artificially included in the CSR actions (Vo, 2011, p.91).
The second line of action relates to the internal environment of the firm, referring to
the organizational culture, but without the rhetorical appearance (suspected by
formalism), often encountered in the practice of large corporations (Badulescu &
Petria, 2013): interpersonal relationships, close knowledge of employee’s profile and
expectations, reduced bureaucracy, direct and unmediated communication (Nielsen &
Thomsen, 2009). The existence of complex written plans and strategies, results from
Fostering Entrepreneurship through CSR 967
detailed and extensive debates, is rather an exception among small firms. SMEs
maintain a high degree of optimism and attachment of employees able to boost them in
increasing sales, profitability and competitive edge (Davies & Crane, 2010; Vo, 2011).
In other words, these organizations focus on finding a dynamic balance between the
selection of the most suitable employees and ”socialization of these and existing
employees into the ‘right’ values” (Vo, 2011, p.93), including the CSR ones.
According to Mousiolis et al (2015, p.582), strategic decisions in SMEs are taken
depending on those factors that matter in their environment (personal feelings,
company resources, friends, and family). However, these factors are not so relevant for
MNEs that usually value global social issues. Moreover, SMEs relate their involvement
in CSR activities to the imminence of a problem and the possibility of faster solving,
while MNEs formalizing them by CRS’s inclusion in plans and budgets, carefully
weighting their effects on overall corporate strategy.
The European Commission Report on SMEs involvement in social and environmental
responsibility considers ”there is a positive and statistically significant relationship
between involvement in external social activities and age of the enterprise […] the
percentage of SMEs involved in these activities increases with the number of years in
business operations” (European Commission, 2002, p.25). Moreover, these studies
consider that the real involvement of SMEs in SR action is achieved after the first 5
years of activities. Confirming this results, Santos (2011, p.496) states "the
involvement of SMEs in the external community is directly related to the size of the
company and its operational age”. The effect of firm characteristics on CSR
involvement was demonstrated also for Romanian SMEs (Saveanu & Abrudan, 2015).
Using data regarding the amounts offered by SMEs as donations or sponsorship, the
authors proved that the amount donated is explained, mainly, by firm’s size (turnover
and number of employees) and age.
In a study on the influence of Corporate Social (and Environmental) Responsibility on
the competitiveness of SMEs in two developing countries (South Africa and Vietnam),
Jeppesen, Kothuis & Ngoc Tran (2012) found that the differences in action is evidenced
not only between MNEs and SMEs but also within the SMEs (i.e. medium sized
enterprises versus small and micro enterprises), ”these differences according to size
are related to factors such as (a) market relations, (b) age, and (c) the industry”
(Jeppesen, Kothuis & Ngoc Tran, 2012, p.143). They found a relation between age, size
and involvement of the company in CS(E)R, i.e. an over 10 years old company is likely
to be one that reached a medium size, has a significant domestic and international
openness, working with large firms and it is clearly involved in CS(E)R activities.
Finally, it should not overlook the fact that the increase in age and size involves a
greater degree of formality of these CSR actions.
Data and methodology
Our analysis is based on a pilot survey conducted among 42 SMEs from Oradea, Bihor
County, Romania. The data was collected on-line and paper based during July -
September 2014. The survey aimed at investigating various issues related to the social
responsibility of organizations. In this paper, we will focus on investigating and
comparing young and older SMEs, regarding issues such as the maturity on social
968 Strategica 2016
responsibility orientations, the type, and domains of social responsibility actions, the
attitudes of SMEs’ managers regarding the role of the business sector in providing
social welfare.
All enterprises in our sample are small and medium in size. The average number of
employees is 24, with a standard deviation of 50.03, a minimum of one employee and a
maximum of 249. The turnover, calculated in euros, registers an average of 2,084,558
euros, with a standard deviation of 8,579,540.9 euros, indicating a rather large
variation of responses in our sample. Regarding the age of the firms, there is also a
wide variety, the older being founded in 1991 and the newest in 2012. In order to
compare the aspects related to social responsibility, we grouped the firms in two
groups: older firms (i.e. which started their activity between 1991 and 2009, and the
newer firms, which started their activities after 2010. As presented in Figure 1, most of
the SMEs in the sample fall under the older group.
Figure 1. Distribution of firms in the sample, based on age (percentages)
Results and discussion
The questionnaire started with some generalities regarding the strategic approach of
CSR related aspects, and then focused on the specific actions organized by the firms.
We will comparatively present all these aspects, starting with the level of formal
embedment of CSR related aspects in the activity of the surveyed firms. As presented in
Figure 2, in most cases the social responsibility is not formalized in the usual activity of
SMEs. Solely in two cases there is a person or a department involved in dealing with
CSR-related aspects, while in less than half of the sample respondents consider that
there are social responsibility components in the profile of the activity. The responses
suggest the lack of maturity regarding social responsibility of SMEs, which is in line
with other research results reported in the field. Moreover, none of the young firms
surveyed has formalized the CSR-related aspects. These findings do not necessarily
mean that SMEs have a disinterest in social responsibility issues and that young SMEs
are not at all involved in any social responsibility actions, but it is merely the indication
of the level that SMEs formalize such an approach.
Fostering Entrepreneurship through CSR 969
Figure 2. Level of formalization of CSR in the surveyed SMEs (number of responses)
Regarding the domains in which SMEs are involved in social responsibility actions, by
far, the most attractive is represented by charity. Nonetheless, as presented in Table 1,
community development is the preferred domain for new companies, which may
suggest a more straightforward approach to social responsibility then charity (a rather
contested CSR domain). However, there are no significant differences between the old
and the new companies, regarding the involvement in any of the domains of CSR.
Table 1. Domains of social responsibility actions undertaken by SMEs
(numbers of ”yes” responses)
Choices for domains of Old New
Total
involvement companies companies
Sport 8 0 8
Culture 8 0 8
Environmental protection 8 2 10
Education 8 0 8
Community development 10 8 18
Charity 16 6 22
Questioning whether companies have organized specific CSR actions, the image is
much more diverse. Respondents were asked to choose (from a list with seven types of
actions) which are the actions they have organized in the last year. The most frequent
types of activity (see Figure 3), for both young and older firms, are donations or
sponsorships, followed by complementary programs for employees. There was one
type of activity not undertaken by any of the firms in the sample, i.e. social marketing
campaigns, and consequently, it was eliminated from the figure.
970 Strategica 2016
Figure 3. Type of social responsibility actions undertaken by the surveyed companies
(number of responses)
Based on these registered responses, we have computed a social responsibility action
summative scale (Figure 4). There are companies with no activities (i.e. most of them),
but meanwhile, there are very involved companies which organize up to six specific
types of social responsibility actions. It is possible that some companies are strongly
involved in only one type of activity and, consequently, they will score little on this
scale, nonetheless, we consider that the propensity to social responsibility actions is a
good indicator of their involvement.
Figure 4. The distribution of the social responsibility action scale
When analyzing the difference between old and new companies, we found a significant
difference regarding the number of type of social responsibility actions undertaken.
Old firms in the sample undertake significantly more type of actions (M=2.18; SD=1.9)
then new firms (M=0.71; SD=0.6); t(43)=3.9, p=0.00. This finding supports the
hypothesis that the age of the firm explains the social responsibility activities.
Moreover, we investigated the attitudes of managers regarding the role of firms in
providing welfare. Even taking into account the relative distance between attitude and
behavior, we consider that managers who acknowledge their role in the development
of the communities are more likely to get involved. This assumption is confirmed by
the relation between these two variables. There is a strong correlation between the
Fostering Entrepreneurship through CSR 971
attitude of managers regarding the role of firms in collective welfare and their social
responsibility actions (Pearson correlation=0.587; sig.=0.00).
Respondents were asked to place their response on a 10 points scale, where 1
corresponds to “collective welfare should be solely the responsibility of governments”
and 10 to “collective welfare should be a priority for the business sector”. The
responses are presented in Figure 5, showing a rather normal distribution, with a
remarkable peak at the average response.
Figure 5. The distribution of responses on the role of business sector in providing social
welfare
We also tried to investigate the differences between the responses of managers of
young versus older SMEs in this regard. Managers of older firms (M=5.15; SD=2.1)
consider in a significantly higher degree that business sector should play an active role
in providing collective welfare, than younger firms managers do (M=3.17; SD=1.5),
t(45)=2.271, p=0.028.
These results suggest an effect of the age of the firm regarding the social responsibility
actions. The older a firm, the more likely it will undertake some form of social
involvement. Moreover, managers of older companies are more aware of the role of the
business sector in providing collective welfare, making these SMEs even more prone to
be involved in social responsibility actions.
Nevertheless, we have tried to isolate the effect of the age of the firm in explaining
social responsibility. In order to do this, we have constructed a linear regression model
for the dependent variable social responsibility action scale. The independent variables
included: age of the SME (the year when it was founded), size (number of employees
and turnover), and the attitude of managers regarding the role of the companies in
providing collective welfare. The model is described in Table 2, R-square is 0.34, as the
model explains 34% of the variation of the dependent variable.
972 Strategica 2016
Table 2. Linear regression model explaining the social responsibility actions scale
Unstandardized Standardized
Coefficients Coefficients t Sig.
B Std. Error Beta
(Constant) -4.158 64.375 -0.065 0.949
Year of founding 0.002 0.032 0.007 0.055 0.957
Number of employees 0.005 0.019 0.696 0.283 0.779
Turnover -3.146E-08 0.000 -0.669 -0.272 0.787
Collective welfare 0.495 0.114 0.578 4.353 0.000
As presented in Table 2, the only significant variable explaining the social activity scale
is represented by the attitude of managers towards collective welfare. The positive
effect means that the more managers consider collective welfare should be a priority of
firms, the higher is the number of social responsibility actions. We acknowledge that
the results in this model should be validated on larger and more diverse samples.
Regarding our hypothesis, the model proves that there is no direct effect of the age of
firms and the number of social responsibility actions. Nevertheless, the age of the firm
affects the attitude of managers as well, and consequently, the relation should be
tested on larger samples. The high impact of the managers’ attitude regarding the role
of businesses in providing welfare suggests also an educational component in
stimulating higher social involvement in social responsibility. Training for
entrepreneurship should also include issues related to social responsibility, both
theoretically and by examples of practices.
Conclusions and limitations
In our study, the influence of the firm age on the social responsibility of SMEs is not
linear. There are different levels of formalization of social responsibility processes
between older and newer firms. While older firms tend to have some reference to
social responsibility in their strategic documents and hold departments or people
specifically for it, young firms lack this formalization altogether. Regarding the
domains of involvement, while young firms are less involved in social responsibility
actions, they show a higher interest in community development programs. Considering
the forms of involvement, there is continuity between older and newer firms, as they
all prefer to offer donations and sponsorships. Nevertheless, new firms are
significantly less engaged in social responsibility actions (measured as a cumulative
scale), confirming our hypothesis that young firms are less involved in social
responsibility actions. However, there is no significant impact of the age of the SME on
social responsibility actions, when analyzed along with other factors such as the size of
the enterprise and the managers’ attitudes regarding collective welfare. Testing these
relations on larger samples of SMEs would give a basis for refuting or supporting our
hypothesis. The sample size is the main limit of our research, followed by the fact that
SMEs representatives surveyed during our study are most probably more opened to
the subject of CSR. We would expect that on the total population of SMEs in Bihor
County, the involvement in social responsibility actions would be less prominent.
Fostering Entrepreneurship through CSR 973
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976 Strategica 2016
WHAT KIND OF VISIBILITY AFFECTS A FIRM’S SUSTAINABILITY
DISCLOSURE?
Giovanna GAVANA
University of Insubria
71 Via Monte Generoso, 21100 Varese, Italy
giovanna.gavana@uninsubria.it
Pietro GOTTARDO
University of Pavia
5 Via San Felice, 27100 Pavia, Italy
pgottardo@eco.unipv.it
Anna Maria MOISELLO
University of Pavia
5 Via San Felice, 27100 Pavia, Italy
amoisello@eco.unipv.it
Abstract. CSR research suggests that organizations engage in sustainability disclosure in
response to stakeholder pressure. They do this in order to demonstrate that their actions
are consistent with societal values while also gaining legitimacy to operate. This
explorative paper investigates how the nature of a firm’s ultimate controlling owner - i.e.
state, family or non-family - influences its disclosure behavior, taking into account
different forms of visibility to stakeholders. We construct a continuous sustainability
disclosure index for a sample of 230 Italian listed firms for each year of the period 2004-
2013. Our results highlight that the nature of the ultimate controlling owner affects a
firm’s different forms of visibility and its response in terms of the extent of sustainability
reporting. More specifically, we find that state-controlled firms are more visible for the
different stakeholder groups and they respond to these pressures by means of a higher
engagement in disclosure.
Keywords: sustainability; disclosure; legitimacy theory; stakeholder theory; visibility.
Introduction
A number of studies interested in the motivations underlying firms’ decision to
communicate social and environmental information suggest that pressures from
various societal groups lead to the use of sustainability disclosure as a means of
influencing these groups’ perception of companies and demonstrate that their actions
are legitimate. Empirical literature provides evidence that visibility, in terms of size,
media exposure, business proximity to consumers and industry characteristics all
expose firms to stakeholder pressure, affecting their voluntary disclosure behavior
(Belkaoui & Karpik, 1989; Branco & Rodrigues, 2008; Cowen, Ferreri & Parker, 1987;
Gamerschlag, Möller & Verbeeten, 2011; Hackston & Milne, 1996; Patten, 1991). CSR
reporting research demonstrates that some ownership characteristics, such as the
level of ownership concentration/ dispersion, foreign ownership, and government
ownership, the presence of a financial investor or management may affect disclosure
Fostering Entrepreneurship through CSR 977
(Amran & Haniffa, 2011; Haniffa & Cooke, 2005; Khan, Muttakin & Siddiqui, 2013;
Mohd Ghazali, 2007; Prado-Lorenzo, Gallego-Alvarez & Garcia-Sanchez, 2009).
However, the research does not address the issue of how the nature of its ultimate
controlling owner shapes a firm’s response to stakeholder pressure.
This paper, drawing on Legitimacy and Stakeholder theories, studies the effect of the
nature of ultimate controlling owners on the extent of sustainability disclosure.
Moreover, it analyses the response of differently controlled firms to various forms of
visibility that imply the pressure of varied stakeholders: employees, society,
consumers, and shareholders. We construct a continuous disclosure index in order to
measure the level of disclosure provided in the stand-alone sustainability reports of a
sample of non-financial Italian listed firms, using a longitudinal data set covering the
period 2004-2013. Previous research has mainly analyzed a cross-sectional dataset
while very few studies have addressed the construction of a disclosure index for a
period of up to five years. We construct a set of proxies for newspapers, web, labor,
community, consumer, environment and foreign investor exposure to measure a firm’s
visibility to different groups of stakeholders. We also take into account firm age,
profitability (ROA) and leverage. We find that state-controlled firms are, overall, more
prone to engage in sustainability disclosure than their counterparts are. Further, we
find that family, non-family and state-controlled firms differ in the level of their
visibility to the various stakeholders. This paper contributes to CSR literature by
highlighting the effect of the different nature of ownership control on sustainability
disclosure as a response to pressures from the different stakeholder groups.
The remainder of the paper is broken down into four sections. We start with the
theoretical background and literary review and then move on to the methodology and
the results presentation and discussion. In the last section, we conclude by pointing
out the study’s limitations, practical implications and some suggestions for future
research.
Theoretical background and literary review
Legitimacy and Stakeholders’ Theory
Legitimacy theory is the theoretical framework most employed in sustainability
reporting research. According to Legitimacy theory, organizations try to prove that
they operate in accordance with the evolving limitations and norms of their respective
society (Brown & Deegan, 1998). In so doing they demonstrate that they are fulfilling
the contract with society that allows them to continue their operations. A failure to
conform to society’s norms generates a legitimacy gap and puts a firm’s durability at
risk (Oliver, 1991; Scott, 1987; Sethi, 1979). Organizations seek to educate and inform
their relevant publics about the consistency of their actions with the values shared by
society or they try to change the perception of their actual behavior in order to gain
legitimacy (Lindblom, 1994). All firms face the need for legitimacy but this constraint
is more, or less, stringent depending on a firm’s visibility and the support it receives at
the political and social level (Dowling & Pfeffer, 1975) as in the case of state-owned
firms (Cormier & Gordon, 2001).
978 Strategica 2016
On the other hand, Stakeholder theory recognizes that society is not a homogeneous
group of individuals with identical expectations but is made up of different groups that
have different expectations about a firm's actions and a varying ability to influence its
behavior (Deegan, 2002). The concept of stakeholders refers to the inter-relationship
between the firm and different groups: shareholders, employees, suppliers, customers,
environment, and community. A firm tries to adapt its actions to the values of its
stakeholders (Haniffa & Cooke, 2005); CSR reporting is a strategic tool for managing
the relationship with its key stakeholders (Nielsen & Thomsen, 2007) and changing the
perception of its legitimacy (Deegan, 2002). According to Grey, Kouhy and Lavers
(1995), Legitimacy and Stakeholder theories are two perspectives of the issue and
Stakeholder theory offers relevant suggestions in order to identify what groups of
stakeholders might have an important influence on a firm’s durability and may focus
the expectations to be met.
Ownership structure
Among factors which may affect a firm’s CSR disclosure practice, extant literature has
considered ownership structure, taking into account the level of ownership
concentration/dispersion, the presence of certain types of a stockholder as well as the
nature of the controlling shareholder.
Regarding widely-held companies, even if the exposure to the scrutiny of a large
number of shareholders and the information asymmetry between managers and
owners calls for more disclosure, prior studies show mixed results, suggesting a
positive relationship between the level of ownership and a firm’s CSR disclosure
(Gamerschlag et al., 2011; Khan et al., 2013; Reverte, 2009) or failing to detect any
significant association (Chan, Watson & Woodliff, 2014; Prado-Lorenzo et al., 2009;
Roberts, 1992). Prado-Lorenzo et al. (2009) demonstrate that the presence of financial
institutions in a corporation’s equity has limited effects on social disclosure, as the
firm’s financial performance is the main concern for this type of owner. The authors
also suggest that when the controlling shareholder is a physical person, the sense of
identification with the firm gives rise to reputation concerns and makes it particularly
salient to assure the survival of the firm in the future. This also explains the higher
propensity to follow a widespread standard, such as the GRI sustainability reporting
guidelines, in order to enhance the comparability of the information supplied. Similar
motivations prompt companies where a family is involved in ownership and
management (i.e. family firms) to provide more CSR disclosure than non-family
counterparts, although the higher degree of autonomy and independence of family
firms, from the institutional context, results in a lower compliance with CSR standards
(Campopiano & Demassis, 2015).
Research has also compared state-owned companies to privately owned companies in
a regulated industry (i.e. electric utility), showing that the former, characterized by
larger size and visibility, provide more environmental and social information in order
to demonstrate that they operate in the public interest (Cormier & Gordon, 2001). The
positive influence on CSR disclosure of state ownership has also been detected in the
Swedish setting where cultural reasons require state-owned companies “to serve as
good examples” (Tagesson, Blank, Broberg & Collin, 2009, p.360).
Fostering Entrepreneurship through CSR 979
Some contributions focused on emerging economies have detected a positive
relationship between CSR disclosure and the level of foreign ownership (Amran &
Haniffa, 2011; Haniffa & Cooke, 2005; Khan et al., 2013). In this situation, companies
would be more prone to supply information about their social behavior to facilitate
capital inflows from foreign investors concerned with social and environmental
matters. On the contrary, the weak power of shareholders other than managers leads
to managerial ownership being negatively associated with the extent of CSR disclosure,
even when manager-owners are family members (Khan et al., 2013; Mohd Ghazali,
2007).
Visibility
A number of studies on CSR disclosure aim to verify whether firms use social and
environmental information as a response to pressure stemming either from society in
general or relevant stakeholder groups. The level of pressure varies depending on the
visibility of the firm that, itself, can be captured by several proxies, notably size,
industry membership and media exposure. The majority of contributions suggest that
larger companies are more active in supplying social and environmental information
due to the greater impact of their operations on society and their greater political
visibility (Belkaoui & Karpik, 1989; Branco & Rodrigues, 2008; Cowen et al., 1987;
Hackston & Milne, 1996; Patten, 1991). Industry membership has been investigated
using various industry classifications. Regarding the distinction between high-profile
and low-profile industries, there is strong evidence that firms belonging to the former
category, given their social visibility, are more inclined to produce CSR disclosures
(Hackston & Milne, 1996; Patten, 1991; Roberts, 1992). Further, companies in
polluting industries, or those closer to the end-consumer, show a higher level of CRS
disclosure in order to reduce the risk of more severe regulations or an increase in
taxation (Gamerschlag et al., 2011). The higher public exposure suffered by firms
nearer to the end-consumer also results in a higher propensity to use the internet as a
vehicle to disseminate community-involvement information (Branco & Rodrigues,
2008). The industry’s environmental sensitivity is relevant in explaining the higher
CSR rating detected for Spanish listed firms (Reverte, 2009). By linking the industry
classification to the pressure exerted by four main stakeholder groups (customers,
employees, environment and investors), Fernandez-Feijoo, Romero and Ruiz (2014)
reveal that firms in industries have the highest level of CRS reporting transparency
where investor or employee pressure is higher, whilst the pressure stemming from
consumers and environment positively affects, but with a weaker impact, disclosure
transparency.
Among external sources of pressure, media exposure plays a fundamental role because
the wider the media coverage the higher the firm’s visibility. Further, crucially, media
are able to influence community perceptions about the importance of specific topics to
which the firm’s activity is closely linked (Brown & Deegan, 1998). Not surprisingly,
research has found media exposure to be strongly and positively associated with CSR
disclosure (Gamerschlag et al., 2011; Reverte, 2009) especially with consumer and
product-related information (Branco & Rodrigues, 2008). Finally, when companies
face a broader and more diversified audience of shareholders and enter a foreign
context characterized by a different system of ethical rules and values than that of their
country of origin, as is the case in foreign listings, CSR disclosure is likely to increase,
980 Strategica 2016
especially so when foreign stock markets are North American (Gamerschlag et al.,
2011; Hackston & Milne, 1996).
Current literature suggests that ownership characteristics affect CSR reporting and
that a firm’s visibility influences its commitment to social disclosure, but what has not
been investigated is how the nature of the ultimate controlling owner affects a firm’s
response to different forms of visibility. In order to contribute to filling this gap we
address the following research question:
RQ: How do family, non-family and state-controlled firms respond to different forms of
visibility?
Research Methodology
Sample
Our sample includes data collected from the stand-alone CSR reports for 230 Italian
non-financial listed firms. Our sample includes all the Italian firms listed on the stock
exchange; firms in the financial sectors have been excluded from their peculiarities and
specific regulatory regime. The data from the CSR reports, as well as the financial,
accounting and corporate governance data, refer to the period 2004-2013. We assign
to each firm/year a disclosure score based on the information gathered from that
year’s sustainability report; this score ranges from 0 to 1. The disclosure of a firm is
measured by defining, in accordance with the G3 standard, a grid of 86 items
measuring environmental, society, labor practice, and product responsibility
disclosure. To each firm/year, a score of 1 is assigned for a specific item disclosed and
0 otherwise: the total score for a firm/year is the ratio between the sum of the scores
and the maximum score relevant for that firm/year. The procedure uses an
unweighted approach in order to reduce subjective assessment. We define a family
firm as one where a family owns at least 20% of common shares. A firm is state
controlled if the state, or some other public body, owns at least 50% of common
shares.
Variables
Our research question focuses on the relationship between voluntary disclosure,
controlling shareholders and visibility indicators. To analyze this topic we take into
account in the descriptive statistics of several control variables. We measure firm age
as the log of firm age. Financial performance has been extensively used in the
voluntary disclosure literature (Brammer & Pavelin, 2008; Branco & Rodrigues, 2008;
Haniffa & Cooke, 2005). We measure financial performance with the return on total
assets ratio (Roa). Leverage (Lev), is measured with the book value of the financial
debt-to-total-assets ratio (Branco & Rodrigues, 2008). The ‘Industry’ dummies take
into account any effect related to industry differences in disclosure practices. Previous
studies have found that firm size is positively related to disclosure, supporting the
claim that larger firms disclose more. Employees in large companies are more
organized and they are more likely to put pressure on management about
transparency and voluntary disclosure (Fernandez-Feijoo et al., 2014). Our measure of
size is a log of employees. ‘EnvSens’ is a dummy variable that identifies firms with
Fostering Entrepreneurship through CSR 981
activities that have a significant impact on the environment (Branco & Rodrigues,
2008; Gamerschlag et al., 2011). The firms operating in the chemical, oil and gas,
mining, paper, construction, steel, electricity, gas and water sectors assume a value of 1
while the other firms assume a value of 0. ‘CostProx’ is a dummy variable that
identifies firms with activities well-known to the general public as a consumer of their
products and services (Branco & Rodrigues, 2008). Firms operating in the sectors of
household and personal products, textiles and apparel, food and beverages, drug
retailers, telecommunications, electricity, gas distribution and water utilities assume a
value of 1, while, for all other firms, the dummy assumes value 0. Besides the
employees’ variable above, we use several other indicators of firm visibility. The first
one is a newspaper exposure indicator (e.g. Brown & Deegan, 1998; Dawkins & Fraas,
2011). ‘Newspaper’ is a visibility indicator based on the number of a firm's articles
contained in the database of Italian financial newspaper "Il Sole 24 Ore". ‘Web
exposure’ is another well-known visibility indicator: it is based on the firm's number of
hits on the web. ‘Foreign listing’ is another possible visibility indicator, this dummy
variable is coded 1 if a firm is listed on other stock exchanges outside the home
market; ‘Sport’ is an indicator coding for a firm’s financing of any sports team;
government and other public bodies’ ownership is likely to put pressure on
management to disclose more information (Naser, Al-Hussaini & Al-Kwari, 2006). We
define ‘state control’ as a dummy variable that takes value 1 if the firm is owned by
public bodies and 0 otherwise. Concentrated ownership has an impact on agency costs
and, consequently, on the level of voluntary disclosure; families are the main
concentrated shareholder all over the world. We identify the listed firms as family
firms if family ownership is equal to, or greater than, the 20% threshold. Concentrated
shareholders will minimize agency conflicts if they control and influence directly the
day-to-day management of the firm, and this could have an impact on the level of
voluntary disclosure. We define an indicator, FCEO, which assumes value 1 if the CEO
is a family member and 0 otherwise.
Results and discussion
Descriptive statistics
Table 1 provides the descriptive statistics for the disclosure index and the variables for
the full sample and the family, non-family and state-controlled subsamples. The
disclosure index has a mean value that is lowest for non-family firms (0.518) and
highest for the state-controlled firms (0.689), while family firms have a mean
disclosure score of 0.546. Family CEOs manage 73.6% of family firms. Family firms are
the oldest with a ln(Age) of 3.39, and state-controlled firms are the biggest with
ln(employees) of 5.85. In the period analyzed, 2004-2013, firm financial performance
(Roa) is high for family firms and low (negative) for non-family firms. The data show
that state-controlled firms are more likely, on average, to operate in sectors with a
higher risk of environmental impact, and have higher consumer proximity, and they
are also more leveraged compared to family and non-family firms. The media and web
exposure of state-controlled firms are higher, and the same is true for their presence
on foreign exchanges and as sports team financers.
982 Strategica 2016
Table 1. Descriptive statistics and t-tests
t-test
t-test
t-test State
State Fam vs
Family Non-Family All Firms Fam vs Con vs
Controlled Non-
State Con Non-
Fam
Fam
Disclosure 0.546 (.283) 0.518 (.211) 0.689 (.229) 0.596 (0.261) -4.71*** 18.16*** -24.30***
Age 3.39 (.701) 3.05 (.871) 3.27 (.982) 3.22 (0.822) -9.99*** -2.20** -2.96***
Roa 0.022 (.097) - 0.01 (.186) 0.018 (.068) 0.008 (.142) -4.87*** -1.02 -1.70*
Leverage 0.496 (.242) 0.471 (.276) 0.528 (0.194) 0.487 (.254) -2.10** 2.09** -2.87***
Employees 4.79 (2.32) 3.57 (2.25) 5.85 (2.86) 4.34 (2.45) - 6.02*** -12.60***
12.25***
Env. sensitivity 0.536 (.499) 0.337 (.473) 0.737 (.442) 0.470 (.499) -9.42*** 6.15*** -11.61***
Consumer 0.355 (.479) 0.228 (.420) 0.579 (.495) 0.317 (.466) -6.45*** 6.65*** -10.90***
proximity
Newspaper 12.74 8.95 (29.33) 47.84 (71.03) 14.01 (40.43) -2.50** 10.37*** -13.11***
exposure (39.24)
Web exposure 13.02 (2.20) 12.26 (2.23) 13.70 (2.44) 12.74 (2.28) -7.86*** 4.19*** -8.22***
Foreign listing 0.034 (.180) 0.047 (0.211) 0.147 (.355) 0.049 (.215) 1.51 7.03*** -5.56***
Sport 0.273 (.446) 0.198 (0.399) 0.421 (.495) 0.252 (.434) -4.05*** 4.71*** -7.25***
FCEO 0.736 (.441) 0.357 (.479)
Discussion
Our findings suggest that state-controlled firms are more visible and are more engaged
in sustainability disclosure than family and non-family firms are. This result is
consistent with Legitimacy theory literature, which posits that more visible and
politically/socially-supported organizations receive more attention from society and
its components (Cormier & Gordon, 2001). Therefore, these firms are more concerned
to show that they act in line with society’s expectations, and those of their
stakeholders, as members of society who have specific expectations. A firm seeks
legitimacy by different stakeholder groups depending on how they help to achieve its
goals, first of all in terms of durability (Zientara, 2015). Our study points out that,
state-controlled firms have a higher visibility in their local community, as a local sports
team might bear their name; in the national community, as newspapers give them
more attention; in the international community, as they are more exposed to foreign
financial markets. They are also more visible for labor, consumers and for the
environment as they tend to have a larger number of employees and to operate in
industries which are closer to the end-consumer and more sensitive from an
environmental impact point of view. Sustainability reporting, as proved by its
increasing adoption (Bebbington, Larrinaga-González & Moneva-Abadía, 2008), is one
of the most advanced forms of disclosing a firm’s socially responsible behavior,
involving systematically a broad spectrum of topics on which the different stakeholder
groups’ expectations are focused. Sustainability reporting is a useful means of
communicating with those stakeholder groups that are unfamiliar with the reading of
an annual report and more interested than shareholders are in social matters. In the
case of state-controlled businesses, citizens are a firm’s ultimate controlling owner,
they indirectly perceive the “return on capital” in terms of social performance that,
therefore, determines a firm’s legitimacy to continue its operations. In family and non-
family firms, the ultimate controlling owner is, respectively, the family or the
individual that directly, or indirectly, holds the firm’s controlling stake. These firms
receive strong legitimacy from their internal stakeholders (Zientara, 2015) and, as a
result, are less likely to engage in voluntary disclosure on corporate social
Fostering Entrepreneurship through CSR 983
responsibility in order to increase legitimacy among external stakeholders. Our study
suggests that family firms are more engaged in social disclosure than their non-family
counterparts are. These firms receive strong legitimacy from their internal
stakeholders, because of the unique tie, in terms of affective endowments, that binds
the family with the business (Berrone, Cruz & Gomez-Mejia, 2012; Gomez-Mejia, Cruz,
Berrone & De Castro, 2011). Nevertheless, family businesses undertake more
disclosure, as family firms are more concerned with avoiding social issues (Dyer &
Whetten, 2006). Our findings show that family firms are more visible to the different
groups of stakeholders than non-family firms: the strong link between the family and
the business reflects a firm’s visibility on the family, therefore sustainability disclosure
is a useful way to communicate that an organization behaves consistently with
society's values and demonstrates that the controlling family and its members are
good citizens and preserve the family’s reputation (Berrone, Cruz, Gomez-Mejia &
Larraza-Kintana, 2010).
Conclusion
This paper addresses the topic of sustainability disclosure, constructing a continuous
index for a sample of 230 Italian listed firms for each year of the period 2004-2013.
Our results highlight that the nature of the ultimate controlling owner affects firms’
different forms of visibility and their response in terms of the extent of sustainability
reporting. In particular, we find that state-controlled firms are more visible for the
different stakeholder groups and they respond to these pressures by engaging more in
disclosure. These findings suggest that this topic deserves further investigation and
verification using rigorous statistical analysis that we will implement as a development
of this exploratory research.
This is an exploratory study and, therefore, has some limitations. We distinguish
companies on the basis of the nature of their ultimate owners - i.e. family members,
non-family members or state - but we do not fully explore the distinctions within these
groups. For example, family firms are not a homogeneous group and further studies
should thoroughly analyze the differences in the disclosure activity between family
and non-family businesses as well as among family companies.
Our results have some implications for practice and the study has some practical
implications. The information it provides is useful for public policy-makers as it may
help them shape their regulatory activity by considering the motivations that underlie
an organization’s attitude to sustainability disclosure, linking the nature of the ultimate
controlling owner and the firm’s response to different forms of visibility pressure.
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986 Strategica 2016
EVOLUTION OF TOURISM DEMAND AND DEVELOPMENT OF
SUSTAINABLE TOURISM: WHAT IMPACT ON TOURIST
DESTINATIONS?
Enrica PAVIONE
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
enrica.pavione@uninsubria.it
Roberta PEZZETTI
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
roberta.pezzetti@uninsubria.it
Abstract. In recent years, the international tourism market highlights the growth of a
substantial segment of demand more aware and attentive to the responsible and
sustainable dimension of the holiday. The growth of the cultural level of tourists, the
increasing awareness of environmental issues, the respect and desire to learn about the
traditions of local cultures are increasingly becoming key criteria in the choice of tourist
destinations. The set of changes affecting the world of tourism, both as regard the
demand and supply sides, is accompanied by increasing attention and sensitivity to
sustainability understood in its social, environmental and economic dimension. These
trends have led to the emergence of a new type of tourist, who aims to live a territory and
to interact with the local community, in a relationship of mutual exchange, which
translate into a new experience for tourists. In this perspective, starting from the review
of the scarce literature on the subject and by the definitions of sustainable tourism
offered by different international institutions official documents, the paper aims to
deepen both characteristics and evolutionary trends of sustainable tourism, with the aim
of capturing the impact this type of tourism could have on tourist destinations.
Keywords: responsible tourism; sustainable development; tourism demand; competitive
strategies; territorial marketing.
Introduction: the evolution of tourism demand and the importance of the
experiential dimension
In present days, the tourism sector is located in the middle of important changes from
both demand and supply sides, changes that put in the spotlight the binomial territory-
tourism as a driving force for development and competitiveness of the tourism offer.
Several studies highlight the important changes in the consumption patterns
(Andereck, 2009; Bramwell, Henry, Jackson, Prat, Richards & van der Straaten, 1996;
Caruana, Glozer, Crane, & McCabe 2014; Chafe, 2005; Weaver & Lawton 2007). If until
the 1970s, the tourist was mostly similar to a mass consumer, with the consequent
Fostering Entrepreneurship through CSR 987
social and environmental consequences that this entails, in recent decades has
emerged a growing demand for experiential and emotional content, with unique
characters and far from standardized holiday (Donohoe & Needham, 2006).
Increasingly, the tourist is configured as a traveler who seeks experiences in the
direction of the so-called “three Ls”: leisure, landscape and learning (Plog, 1974).
In this context, the tourist shows a marked sensitivity to the experiential aspects of
leisure time, focusing on both the discovery of the intrinsic characteristics of an area,
together with the development of a set of relations with the indigenous reality.
Tourists seeking not a tourist experience of the generic type, but more complex and
profound experiences, enabling them to appreciate both the elements of the identity
and the specificities of a territory (Chafe, 2005; Franch, Sambri, Martini, Pegan & Rizzi,
2008).
Several factors explain the changes in tourism demand. First, psychological and
emotional aspects, together with social and cultural factors increasingly influence the
tourist orientation. In addition, it is evident the progressive disintermediation of the
traditional distribution channels and the consequent spread of multi-channel supply
and co-production driven by the demand, at least in part stimulated by the use of the
potential of the Web. In this framework, the tourist's choices are often dictated by
community-based mechanisms, a fact which requires operators of the sector's ability
to exploit social components of the tourist experience (Wearing, Cynn, Ponting &
McDonald, 2002). The rise of alternatives for the tourist is a result, finally, that open
new markets and new destinations, inaccessible until a few years ago from a
commercial or geographical point of view (Franch, Sambri, Martini, Pegan & Rizzi,
2008; Goossens, 2001; Han, Hsu & Lee, 2009).
The evolution that affects the tourism sector highlights the need for the industry to
direct the company's strategies in the direction of increasing the quality of the tourist
product, playing particular attention to the role of the tourist and the customization of
his travel experience (Pencarelli, 2003). In this respect, it should be pointed out that, in
general, between the tourist and the tourism business - understood as a bidding
system - there is an inevitable both information and cognitive asymmetry (Goossens,
2001).
The tourist expresses a wide and complex vision of the tourism product, against whom
has expectations of functional, social, cultural, psychological, making comparisons
between these expectations and lived experience; by contrast, the tourist company
tends to have a more limited and circumscribed approach (Tamma, 2002; Franch,
2002; Pechlaner & Weiermair, 2000; Cherubini, 2008). The quality of the tourist offer
perceived by the tourist is not based on objective characteristics of the product and on
the judgment resulting from experience, which appears to be the result of the
interaction between tourists and the bidding system. The satisfaction of tourists'
expectations is the result of an experiential process, in which the perception of quality
depends on the greater or lesser propensity to take advantage of the tourism product
and the gap between expectations and experience. The quality of tourism services
provided influences the overall satisfaction of tourists and consequently, the
experience lived within a given territory. The perception that the tourist develops
against a tourist destination is not motionless, but also significantly alters during the
988 Strategica 2016
process of inquiry or purchase of the travel services (Chafe, 2005; Frey & George,
2010).
In other words, the tourist, within the chosen destination, lives an overall experience
that led him to make a judgment on the set of both all the material and intangible
factors, with which it comes into contact, in a continuous interaction relationship with
the territory and its tour operators. Hence the need for the industry to arrive at a
correct identification of the level of customer satisfaction in order to improve the
ability to offer and continuously monitor the evolution of the end-customer
preferences.
In this framework, a tourist destination is competitive only if it can generate in the
tourist a unique experience, higher than that offered by its competitors. Its
competitiveness is defined by the degree of imitability and reproducibility of the
attractions available; this explains the relevance of certain categories of resources
(natural, artistic, architectural, anthropological and cultural ones), which can be not
taken elsewhere. The development of tourist destinations is closely linked to their
environment, to the cultural, social interaction, security, and wellbeing of local
populations. These characteristics make tourism the driving force for the protection
and development of the destinations.
This differentiation capacity comes to depend on a plurality of factors, widely
investigated in the literature (Buhalis, 2000; Valdani & Ancarani, 2000; Dwyer & Kim,
2003). The type of resources (natural, landscape, cultural, etc.); the support
infrastructure: the capacity of innovation; the behavior of individual traders and above
all intangible and intangible elements of identity, knowledge, relational and trust funds
it develops in a given context.
The development of sustainable tourism
The set of changes affecting the world of tourism, both on the demand side and the
supply side, is accompanied by a growing attention and sensitivity towards
sustainability, understood in its broadest sense, in social, environmental and economic
terms. This trend has led to the emergence of a new segment of demand, e.g. tourists
who aim to interact with the local community, in a relationship of mutual exchange,
thus tourism becomes experience (European Commission, 2012; Buckley, 2012; Dwyer
& Kim, 2003; Franch, 2000).
In recent years, it is the so-called sustainable tourism, defined in 1988 by the World
Tourism Organization (UNWTO. In particular, the tourist activities are sustainable
when they develop in order to remain viable in a tourist area for a time unlimited, do
not alter the environment (natural, social and artistic) and not hinder or inhibit the
growth of other social and economic activities. The concept goes back to the more
general definition of sustainable development given in 1987 by the World Commission
on Environment and Development in the Brundtland Report (Wheeler & Beatley, 2004,
p.56): “Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own needs”. The
link between sustainable tourism and local communities has also been emphasized in
Fostering Entrepreneurship through CSR 989
numerous institutional communications, among them the “Lanzarote Charter for
Sustainable Tourism” in 1995.
The document states that the development of tourism must be based on criteria of
sustainability in the long run; the tourist offer must be economically viable and
ethically and socially equitable in respect of local communities. Sustainable
development is a guided process that envisages global management of resources to
ensure their viability, allowing the preservation of the natural and cultural capital. The
Charter lays down the three key rules, which must be based on the development of
sustainable tourism: 1) environmental resources must be protected and guaranteed;
2) local communities must benefit from this type of tourism, both in terms of income,
and quality of life; 3) the tourists have to live an integrated experience with the host
community.
The 1997 Berlin Declaration, which focuses attention on sustainable development,
setting further cornerstones in defining the relationship between sustainable
development and sustainable tourism:
- sustainable tourism is accompanied by a judicious exploitation of biological diversity,
and can contribute to its preservation;
- the development of tourism must be controlled and managed wisely, to meet the
needs of sustainable and lasting development;
- sustainable tourism is responsible for the collection of tourist operators, in particular,
the private sector. Spontaneous initiatives should be encouraged;
- great importance is given to the local level, which accepts responsibility for
sustainable development of tourism.
At European level, the reflections on sustainable tourism have been expressed in
numerous documents of the European Commission, which emphasize the importance
of sustainable tourism for the growth and competitiveness of an economically
important industry in Europe, which the tourism itself (European Commission, 2012).
The economic literature does not show the uniqueness of views on the concept of
sustainable tourism (Weaver, 2006; Goodwin & Francis, 2003; Buckley, 2003). In
recent years, many studies on the phenomenon have investigated the different
characteristic features (Butler, 1999). Most of the researchers focus on the economic
impact of sustainable tourism, adopting the perspective of the host territory. By
contrast, the tourist's point of view manager and his experience are less investigated in
the literature (Frey & George, 2010; Sin, 2010).
Beyond the individual positions (Fennel, 2002; Buckley, Pickering & Weaver 2003;
Goodwin & Francis, 2003), what is clear is that this market segment highlights a
number of key features: the focus on the respect and protection of the environment
(Krider, Arguello, Campbell & Mora, 2010), the tendency to reduce the environmental
impact resulting from related activities to tourism, a particular attention to the
protection of traditional culture of the local people. Significant, in this regard, the
definition provided by Bramwell et al. (1996, pp.10-11): “Sustainable tourism is
tourism which develops as quickly as possible, taking into account of current
accommodation capacity, the local population, and the environment. Tourism that
respects the environment and consequently does not aid its own disappearance. This is
especially important in saturated areas. Sustainable tourism is responsible tourism”.
990 Strategica 2016
Sustainable tourism tends to the preservation of the landscape and environmental
diversity of a territory and therefore requires a proper management of the natural
heritage and cultural heritage of the territory, in order to preserve its identity. In this
perspective, sustainable tourism stands as driving force for the conservation of the
environment, art, culture of an area (Hunter & Green, 1995; Middleton & Hawkins,
1998).
From these considerations, it is evident the close link between sustainability and
quality of life declined in its forms of economic development, social equity, respect for
the environment.
The reasons for the development of sustainable tourism
There are several reasons for the development of sustainable tourism (Goossens,
2000; Balmford, Beresford, Green, Naidoo, Walpole & Manica, 2009). First, it can be
considered reasons for purely psychological and emotional: the restlessness and
boredom are part of the pursuit of great personal experience, which gives the tourist
the search for a realization in some place, in view of what could be called the perfect
vacation. This desire, in general, is not satisfied by mass holidays, standardized, but try
different paths, new, little explored, able to convey value and wellbeing. From this
point of view, some studies consider sustainable tourism as a reaction to the impact
resulting from mass tourism (Wheeller, 1990; Miller, 2003; Mckercher, 1993).
Contrary to mass tourism, sustainable tourist wants to have the ability to customize its
vacation, moving freely on multiple levels, from the sporty to the environment, from
food and wine to the cultural, etc., thus placing itself as a subject investigator, open to
human and natural experiences. In addition to that and in more recent years, this type
of tourist becomes even more flexible, ecological, more attentive to the quality of the
products we consume, all as an expression of a society more aware of the issues of
sustainability and social responsibility (Ciciotti, Dallara & Rizzi, 2008; Colombo, 2005).
The sustainable tourism also recognizes the centrality of the local host community and
its right to be a leader in sustainable tourism development and socially responsible
(Pencarelli & Splendiani, 2008). This type of tourist looking a unique experience that
allows him to live and enjoy in practice the elements of the identity of a territory and
their specificity, factors closely associated with the quality of the experience (Uriely,
Reichel & Shani, 2007, Sambri & Pegan, 2008).
It is not just the desire to visit a place, but above all to get in touch with traditions,
habits, and lifestyles of a community. The size of the active tourist, who led a desire to
interact with the local communities, emphasizes the importance of the role played by
residents and a welcoming policy based on the identity of the territory. From this point
of view, the need to meet the changing needs of tourists promotes the success and
development of specific business formulas of receptive nature, consistent with the
need for sustainability developed by tourists. Integrating the focus on sustainability in
their business, the industry protects the competitive advantages of its territories, with
their inherent diversity and variety of landscapes and culture (Ritchie & Crouch, 2000;
Uriely, Reichel & Shani, 2007).
Fostering Entrepreneurship through CSR 991
It is therefore of great importance to consider the link between the model of
sustainable development that a territory intends to pursue and the factors of
attractiveness in which it aims to achieve levels of excellence and, consequently, the
segments of demand which intend to address. This suggests the importance of creating
a virtuous circle among local actors-resources-attractiveness. This process starts from
the clear identification of the type of attraction on which the territory excels or intends
to reach levels of excellence (World Tourism Organization, 2002).
In this regard, priority is the analysis of the spatial characteristics of the offer in order
to identify opportunities for improvement and enhancement. Crucial in this regard is
the choice of strategic positioning, which consists in identifying the market space
where a territory is able to excel. The positioning choice then arises behind the vision
of a territory, which implies assumption by government bodies of a precise orientation
about the bidding areas in which to invest as a priority.
All these issues require a decision-making process of a strategic type, as part of a
territory, aimed at addressing the paths of the tourist development. This is even more
relevant to the type community destinations (Murphy, 1985), which present some
specific traits:
- resources and activities are widespread, that belong to multiple independent
business units;
- the territory as a whole is on the market offering a wide range of attractions
resources;
- the local government plays a vital role in tourism, as it controls the landscape
resources and can support the offer through various incentives.
In the tourism sector, in fact, the wealth of natural resources is not in itself sufficient to
meet the new competitive dynamics, if not handled properly in an innovative way by
the operators of the system (both private and public).
The continued sustainability of an area, condition to attract sustainable tourism,
depends on the ability of all actors involved to coordinate their choices in order to
enhance the territory, within the limits of its sustainable use. Of fundamental
importance is the participation of all public and private stakeholders, in a spirit of
strategic partnerships.
The governance of sustainable tourism development
The dynamics involved in the tourism market have gradually increased the importance
of local territorial systems. In tourism, in fact, the competition is not played much on
the individual player or locality, as among local or regional systems and their ability to
respond, in a differentiated way, to an ever more selective demand, which in turn is
confronted with an increasingly wide range, flexible and accessible offer (Wheeller,
1990).
In this framework, the role of business becomes meaningless. The ability to attract
more tourists less depends on the action of individual components, but it is the result
of the systemic and synergistic action between the various stakeholders of a territory,
which is expressed in a common development plan.
992 Strategica 2016
In this context, an important role can be played by all the actors present in an area,
which can serve as a driving force for the activation of promotion and appreciation of a
territory (Crouch & Ritchie, 1999; Bramwell & Lane, 2000). The ability to combine the
different components of the offer local, in to generate a coherent and shared image is,
in fact, the essential factor in the success of an appropriate strategy for enhancing a
spatial reality.
In this framework, it becomes crucial to managing the relationships between the
tourism system and the tourist and, at the same time, to govern upstream relationships
between all stakeholders in the tourism industry. This presupposes the need to
identify a governing body capable of developing a strategic plan that values both the
businesses and the set of attractions of a given territory.
The identification of the authority of government land (Pencarelli & Splendiani, 2008)
able from one hand to set clear development goals shared among the actors of the
tourism system and front the other hand to determine the strategic orientation of the
territorial destination, is of paramount importance for the competitiveness of the
territory. However, the identification of the candidate for the strategic coordination of
a territorial destination is not an easy task. In particular, in the areas where prevails a
certain fragmentation of the tourist offer, it can be problematic to express a strategic
coordination unity for the governance; conversely, in local territories where prevails
the collaborative logic it seems easier to identify a person acting as the control room in
steering a path of the tourist valorization.
The difficulties of the government of a territorial system in tourist destinations are
particularly evident for the community type. In these destinations, in fact, it is the
territory and not the individual company to present itself to the tourist attractions
with a set of resources. The latter are therefore not owned by a single entity, but
several different business units, each of which expresses its own objectives and
strategies. This prevents the outright implementation of typical enterprise
management models in the field of community-type destinations since the latter are
similar to business networks that work together. It is thus the need to coordinate, in
the medium to long term, the services offered by the different actors (public and
private) contributing to building the tourist offer, leading to the definition of a unified
strategic vision. Hence, the opportunity is to frame the tourist offer of the kind of
community destinations within the framework of the network approach and the
stakeholder theory (Bramwell, Henry, Jackson, Prat, Richards & van der Straaten,
1996).
An effective system of exploitation and tourism promotion of a territory and the
problem of governing its development cannot be separated from the introduction of
innovative ways of collaboration between multiple stakeholders, enabling extended
forms of participation to all stakeholders (Velo, 2004).
The complexity of government of a territory also stems from the fact that the
government of economic development belongs to multiple institutions that operate on
different spatial planes; besides, the progressive presence of innovative forms of
public-private partnerships lead to the affirmation of new actors, active in promoting
local development initiatives. Such entities (special purpose agencies, joint bodies,
representing subjects of social forces, etc.) act on different levels and increasingly are
Fostering Entrepreneurship through CSR 993
tied to public institutions from direct and indirect relationships, influencing the local
governance process (Andersen & Van Kempen, 2001). In particular, a greater
involvement of public and private actors on a territory has the potential to increase the
shared decision-making process and its concrete implementation.
The above considerations show that the complexity of community destinations
requires the taking of a governance process that follows, at the same time, both a top-
down and a bottom- up approach. Each of the two mechanisms has significant
strengths to an adequate system of government land. The first ensures the overall
consistency of the system, in terms of strategic planning and optimal resource
allocation; the second favors the direct relationship between the various departments
within the local community.
It does not seem longer sufficient to manage the relationship between the tourism
system and the tourist but is fundamental to govern upstream relationships between
all stakeholders involved in the tourism industry. This assumes that each tourist
destination defines a governing body, public or private, able to develop a strategic plan
that enhances the area's attractions. The need to integrate the actions of the different
actors towards innovative and advanced forms of offer, which combine private
business interests with public development needs, highlights the role of a subject
involved in the tourist that could acts to guide and coordinate bot the goals and
activities of all different local tourism operators involved in the territory. Such
territorial government body, with the role of the control room, should constantly
ensure the convergence of top-down and bottom-up processes and must be able to
implement strategic actions together with the local tourist system management, to
improve the competitiveness of the territory as a whole.
Given these considerations, however, it emerges as the need for a strong and focused
synergy between the different actors involved in the tourism offer often represents
one of the most critical aspects of the tourism industry. Only by overcoming the
fragmentation both of goals and interventions and by providing tools for the
coordination of the different actions and actors, sustainable tourism can become an
important driving force for the development of territories far from main roads of
tourism, but rich in excellence and development potentials.
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Fostering Entrepreneurship through CSR 997
CYCLE TOURISM AS A FORM OF SUSTAINABLE TOURISM: THE
IMPORTANCE OF A POLICY FOR ITS ENHANCEMENT
Enrica PAVIONE
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
enrica.pavione@uninsubria.it
Roberta PEZZETTI
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
roberta.pezzetti@uninsubria.it
Abstract. Within the framework of sustainable tourism, that is increasingly gaining
ground in industrialized countries, the cycle tourism (or bicycle tourism) represent an
original tourist proposal, with a strong experiential value, that focuses on both little-
known areas and on the discovery of a territory. Cycle tourism represents a concrete
expression of sustainable tourism, geared not towards mass tourism or elite tourism, but
toward more sustainable forms of holiday that allow low consumption of natural
resources and a strong connection with the land, its culture and its traditions. In this
sense, cycle tourism can lead to a range of effects on the local economy, ranging from
positive economic and environmental impact to the nature conservancy and the diffusing
capacity of virtuous behavior and good practices. The cycle tourism also has a longer-
term economic impact that is harder to quantify, both in marketing the territory’s
attractions and even in job creation. After all, bike-minded improvements in
infrastructure and enforcement create healthier, more economically sound places not just
to visit but also to live. The ability to capitalize on the potential offered by cycle tourism
requires the presence of a network of local actors, both public and private, which act
synergistically to the success of the initiative. At a policy level, this implies the need to
develop any projects in an integrated perspective, involving all the stakeholders of the
territory. The most successful international experiences, analyzed in this study, show that
the expansion of cycle tourism needs to be supported by original forms of public-private
partnerships, oriented to build innovative and advanced forms of offer that combine
entrepreneurial private interests with public development goals.
Keywords: cycle tourism; sustainable tourism; governance of local territories; public-
private partnerships; territory reputation.
Introduction. Development patterns of cycle tourism and the characteristics of
demand
Within the framework of sustainable tourism that is a well-established trend in
industrialized countries, it is part of cycling, original tourist offer that often favors
little-known areas, looking for a particular holiday, once in the first place to the
discovery of a territory. It is a form of strong experiential value tourism, which
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provides direct contact with a territory, its culture, history, tradition, at a speed that
can be defined on a human scale (Becken, 2006). From this point of view, cycling can
be considered a form of slow tourism, which allows you to enjoy and at the same time
to preserve the environment, which is the main attraction of cycling itself. As with the
other desserts sports, often related to nature, cycling goes well with so-called "slow"
areas, where we find the quality of the landscape, agriculture of excellence, the local
culture, traditions, etc. (Dickinson & Dickinson, 2006).
In this perspective, knowing a cycling territory exceeds the clichés of the mass holiday,
which often creates a barrier between the territory and its culture, placing the tourists
in an artificial seeds context. The choice of the bicycle as a means and thread to pause
to discover the many attractions rich territories favors, in fact, a new leisure culture
and becomes a tool for disseminating good behavior and a way of life on a human scale
(Lamont, 2009).
It is a widespread practice, especially abroad, particularly in German-speaking areas,
which in recent years is enjoying a growing popularity in many Italian regions. This
spread shows the presence of a growing audience who chooses the bicycle as a means
for their holiday.
To understand the peculiarities of the cyclists, it may be appropriate for a general look
at the universe of users of the bicycle, which shows an extremely varied reality. A
survey conducted in 2000 by the Institute of CIRM market research on the use of the
photographer cycling six categories of users of the bicycle, which correspond to
different user functions:
- the city cyclist, who use the bike mainly to avoid the traffic and queues in the city and
to improve air quality and the environment;
- the romantic, who likes to visit the city in the evening, to find out particularities and
nuances in a different light;
- the cycling tourist, who sees the bike the way to get in touch with nature;
- the adventurer who prefers to tackle long distances and difficult;
- the amateur cyclist who, inspired by the champions of cycling, likes to use the bicycle
to reach a goal;
- the professional.
This heterogeneity in the use of the bicycle as a witness, on the demand side, it is
difficult to identify in detail the characteristics of the cyclists (Cohen, Prayag & Moital,
2014; Hungenberg, Gray, Gould & Stotlar, 2010). The scarce literature on the subject,
usually due to cases in-country or regional and local experiences, identified several
characteristic features of the cycling tourist-type (Ritchie, 1998; Cushing, 1997;
Corneiro, Brede & Cordero, 2016; Faulks, Ritchie & Fluker, 2006; Høyer, 2000; Ritchie,
1998; Ritchie, 1999).
Simonsen and Jorgenson (1998, p.21) define the cyclists as: “A person of any
nationality, who at some stage or other during his or her holiday uses the bicycle as a
mode of transportation, and whom cycling is an important part of this holiday” .
According to Lumsdon (1996, p.27), cycling is a “Recreational cycling activities ranging
from a day or part-day casual outing to a long distance touring holiday. The
fundamental ingredient is that cycling is perceived by the visitor as an integral part of
an excursion or holiday, i.e. a positive way of enhancing leisure time”.
Fostering Entrepreneurship through CSR 999
The centrality of the means of transport in the experience of a cycling trip, regardless
of the organization of the holiday mode, is at the center of defining cyclists proposed
by Ritchie et.al (2010, p.411). “A person who is away from their hometown or country
for a period not less than 24 hours or one night, for the purpose of a vacation or
holiday, and for whom using a bicycle as a mode of transport during this time away is
an integral part of their holiday or vacation. This vacation may be independently
organized or part of a commercial tour and may include the use of transport support
services and any type of formal and/or informal accommodation”.
In general, the different definitions of cyclists lead to the conclusion that it can be
considered as the one who spends their holiday in bicycle, preferably with a mode is
itinerant, moving step by step to the final goal. These are stakeholders not only to the
bicycle but, more generally, for an active holiday, comprised of more size, sport, rest,
local knowledge, curiosity about the culture, traditions, food and wine, etc. The bicycle
becomes the means to discover a territory from an unusual and original perspective,
far from the traditional circuits (Lumsdon, 2000; Ritchie, Tkaczynski & Faulks, 2010).
As part of the application segment due to cyclists, you can find very different subjects
by age, social background, level of education, however, all united by the desire to live
an experiential holiday using the bicycle in order to qualify a resource that puts
territory their disposal (Hungenberg, Gould & Stotlar, 2010). It is, therefore, to tourists
looking for a personalized holiday that combines the physical and mental well-being,
quality of life, recovery and strengthening of the link with the environment (Ritchie,
Tkaczynski & Faulks, 2010).
A recent survey by the Autonomous Province of Trento identifies the traits
characterizing the cyclists (Provincia Autonoma di Trento, 2010): it is, first, the
relatively young subjects with a high level of education. Preferably, traveling family or
couple and are particularly attentive and sensitive to local attractions, which tend to
discover with the “soft” approach that comes from the use of the bicycle. They are
concerned about the presence and the use of support infrastructures, such as public
transport, and especially to the peculiar resources of an area. The research shows that
there is, in fact, the propensity on the part of cyclists to combine sporting activity
cultural and nature tours. The cycle path is experienced in a varied by cyclists; for
some is a sort of open-air gym, for the enjoyment of the environmental and landscape
resources of a territory while doing physical activity, for others an original mode and
slow to live and discover a region and its attractions (Nocifora, 2011).
Attention to local tourist supply details as a whole, not just to the bike path in the strict
sense, highlights the desire for this type of tourist to "live" the travel experience that
captures the territory in its entirety. In this perspective, it is to outline an experience of
mutual learning cycle tourist-land, a sharing of values ingrained in the history and
traditions as well as a real possibility of protecting biodiversity and promoting
sustainable forms of development (Lumsdon, 2000; Ritchie & Jay, 1999).
The characteristics of cycling, in fact, show that this form of tourism is attributable to a
model of sustainable tourism, as a carrier, at the same time, a social value /
environmental and economic.
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From the environmental point of view, in many documents and studies on sustainable
tourism, the environmental impact of tourism-related transport is identified as a
critical element. For these reasons, the bicycle is recognized by many as the ideal
means of transport to reduce emissions and thus promote sustainability-oriented
behaviors.
In the report “Action for more sustainable European tourism” drawn up in 2007 by the
Tourism Sustainability Group underlines the central role of the bicycle as a means of
sustainable transport. Similarly, the European Charter for Sustainable Tourism in
protected areas states: “Customers will be encouraged to make maximum use of
collective transport or to discover the protected area by bicycle or on foot or by other
non-polluting vehicles. This policy will cover both access to tourist facility, is on the
move in the protected area”. The bicycle represents an efficient tool from the point of
view of energy, being virtually free of emissions; In this respect, a recent study of the
European Cyclists' Federation shows that pedaling at least 2 km and a half a day would
lead to a reduction of 25% CO2 rate in the European Union.
The World Health Organization estimates at 110 billion euro savings in healthcare
costs achievable using the bicycle. The environmental sustainability related to the use
of the bicycle is further confirmed in the same behaviors of users of bicycles for
tourism purposes. In this regard, a survey conducted by the European Parliament
shows that cycling tourists, who carry out both day trips, that longer holidays, tend to
begin their journey by bicycle or in any case to use of environmentally friendly
transportation (Weston, 2012).
The use of bicycles produces positive effects, in terms of environmental sustainability
level, even in relation to the target location. The territories affected by the cycling
show, in fact, a reduction of vehicular traffic and consequently of emissions, noise
pollution, and an increase in pedestrian mobility, even as an indirect effect of policies
linked to the promotion of cycling (Formato, 2009). If properly supported by adequate
national and local policies, the spread of cycling can also improve the overall level of
road safety, reducing the social costs of traffic and accidents (Becken, 2006; Carneiro,
Breda & Cordeiro, 2016).
From an economic point of view, to understand the value of cycling, it can be worth a
look to the bicycle market as a whole. The growing importance of the bicycle market
has led, in recent years, the development of specific studies on the economic
contribution resulting from the use of the bicycle, studies by several parties are
classified under the term bike economy. The employment figures show that in Europe
the employed who work in related industries generated from cycling are more than
650 thousand (European Cyclists’ Federation, 2014). In 2015 the European Cyclists'
Federation has tried to calculate the economic value of bicycle use in European
countries, estimating an annual turnover of about 200 billion euro, which includes the
sale and rental of bicycles and components, the development of cycling infrastructure,
the environment benefits, health benefits quantified as savings in health spending
(European Cyclists’ Federation, 2015). The same survey showed that the cycling
industry moves every year in Europe, more than 44 billion euros (of which only 12 in
Germany).
Fostering Entrepreneurship through CSR 1001
In the light of these considerations, it seems undeniable that cycling can become if
properly managed, an important tool for territorial marketing in local development
logic.
Cycling tourism as a development driver of the territories
Cycle tourism is a form of sustainable tourism, if properly built and supported, it can
cause a number of positive effects on the local economy (Faulks, Ritchie & Fluker,
2006; Cope, Doxford & Hill, 1998).
International and national experiences of the successful first show that the territories
that choose to present itself to the cycling experience a significant increase in tourist
flows. With reference to Italy, the Italy of the bike hotels consortium data record, in the
2012 season, a million and a half cycling presence on national territory, of which 80%
are foreigners. Over the past five years, the cyclists mostly from Northern Europe
increased by 15%, a fact which highlights the potential of a strategic market, especially
for smaller territories.
The increase in the number of tourists is accompanied by the seasonal adjustment of
the offer; in most cases, the most appropriate time for a cycling holiday is the period of
the low season. This potentially represents an exciting opportunity for tour operators.
The territories suited to cycling also show a significant increase in employment. From
this point of view, cycling enhances the zones crossed, even those that are marginal to
the tourist mass migration, with obvious positive effects on the economy of an area
(hotels, restaurants, cottages, campgrounds, etc.) and encouraging the birth of local
tourist business initiatives. Besides the aforementioned induced linked to cycling, in
areas crossed by the cycling phenomenon of the emergence of new players such as
cycling guides or new managers in tourism and sports, such as mobility manager. From
this point of view, the World Health Organization has estimated that achieving high
levels of cycling mobility in Europe could allow the creation of nearly 80,000 jobs.
Cycle tourism is, therefore, possible to develop territories not covered by the major
axes of tourism, with the possibility to activate a process that gives rise to a number of
supporting activities related to cycling tourism: hospitality points and refreshment,
crafts, rental and repair bicycles, publishing, tour operator specialized in organizing
trips by bicycle (Lumsdon, 1996; Lumsdon, 2000; Nocifera, 2011).
Many industry studies also show that the cycling tourist is very willing to make
purchases and to make use of services, if they are available, especially in those places
far from the beaten track. Tourism so-called "slow" allows tourists to look around, to
interact with the local population, to have more buying opportunities. In this sense, the
promotion of "sweet sports" related to nature, such as hiking and cycling trails
harmonizes well with an economy based primarily on agriculture, on the excellence of
the typical and food products.
In addition to the aforementioned economic and environmental impacts, a cycling
project is a driving force for the growth of a culture of sustainable mobility for the
resident population, with undoubted benefits across the entire region. In this way, the
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cycling becomes a tool for disseminating good behavior and good practices (Corneira,
Breda & Cordero, 2016; Shipway, King, Sunny Lee & Brown, 2016).
Finally, the development of cycling allows the preservation of the territory, by the
recovery of the smaller existing roads, the artifacts, the sediments, the vicinal and
country roads, disused railways. It is, in many cases, the existing road network, which
suitably enhanced, reported, and enriched with interventions even of the modest
entity, becomes heritage usable for all the sweet tourism. The renovation and
conversion of existing infrastructure contribute, thus, to create a network of green
streets, centers on promoting the realization of so-called green infrastructure, in line
with the latest recommendations from the European Commission, which sees the latter
as a network of natural and semi-natural areas planned at the strategic level, to offer a
wide spectrum of services.
The survey of bicycle paths, of establishments receptive and, in general, all the
infrastructure necessary for the development of a cycle tourism project, together with
the analysis of the potential demand are the first step to realizing a tourism system
based on the use of the bicycle. Exploiting the potential existing in the territory for the
development of cycling involves the proper management, organization, and activation
of important synergies with all actors involved, in the framework of a strategic plan
covering all the interests at stake.
The importance of a system policy for the development of cycling
From all the foregoing considerations, it is evident that the territory that chooses to
present itself to cyclists must commit to a "product" that is attractive, with a series of
interventions. In this sense, marketing plays a central role in the strategy, when it can
facilitate the construction of territorial offer capable of meeting the expectations of the
subjects that the territory's interest to attract, depending on the model of sustainable
development pursuing (Cushing, 1999; Weston, Davies, Peeters, Eijgelaar, Lumsdon,
McGrath & Piket, 2012).
More specifically, articulated elaboration of a marketing strategy aimed at the
development of cycling in view of a land development involves a few key steps defining
the mix of structural features and services offered from the area; the identification of
an appropriate system of incentives for existing and potential users of the services and
facilities offered by the area; the identification of effective methods of distribution of
services and products of the territory; promoting the image of the area, so that the
users will perceive the intrinsic value (Di Marcello, 2016).
In this context, it is crucial to offer tourists the chance to come in contact and to qualify
for a natural environment and local culture of excellence, made of products, events,
traditions, economic activities, etc., through a network of cycling routes that facilitate
the movement called "slow".
The local communication gains, in this perspective, a fundamental value, while
presenting different elements of concern related to the complexity of the territory
system. An effective communication strategy for the territory should consider two
levels, the regional and local supply system. In the first case, the communication
Fostering Entrepreneurship through CSR 1003
concerns the general characteristics of the territorial system, its vocation and overall
image, the factors of attractiveness. In terms of local supply, communication affects the
attractiveness of the relevant factors for specific market segments and user functions.
Crucial to this end is the establishment of a planning team of public and private
stakeholders of the territory, a sort of control room, with well-defined strategic tasks:
- analysis of the reference features to highlight success factors and critical issues;
- the creation of a long-term strategy, built from resources and opportunities in the
territory;
- the development of an action plan, divided into intermediate steps, indicating the
investments and actions needed to achieve its goals.
The orientation of the long term is related to the fact that interventions on most of the
factors characterizing the territorial offer require a period of at least the medium term;
This aspect emphasizes the importance of public-private partnership (Hunter Cycling
Network, 2005).
The above considerations show that the cycling development is linked to the presence
and/or construction of a number of elements that could be defined as "facilitators",
some of which are intrinsic to the territory (such as natural resources), other effects of
territorial policies. Table 1, albeit with reference to a specific regional experience is, to
a good approximation, the set of factors that facilitate the development of cycling in a
given geographical area.
Table 1. Factors that facilitate cycling experiences
Attractions Built attractions Town
Restaurants
Historic sites
Accommodation
Natural attractions Scenic view
Forests
Lakes
Information Maps Hard copy & electronic should include
information on accommodation, location of
toilets, shop &bike storage, description of terrain,
grading & surface of tracks, key attractions
Signage along
routes
Routes Variety of lengths Circular or out & back day routes on quiet roads
Overnight trails with various accommodation
along route
Longer overnight trails with accommodation and
/or facilities
Routes that link sites or geographic, historic &
cultural interest
Routes that connect towns or villages
Variety of terrains
Public Transport of bikes Trains
Transport required Buses
Aeroplanes
Tour Can provide:
Companies guided tours, transport for gear and luggage,
support services, including organizing
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accommodation & meals
Bicycle Hire Should be available near promoted cycle routes
Accommodation Cycle friendly Can be identified and promoted to potential cycle
accommodation tourists
Storage and Secure storage of Cafes and restaurants
Parking bikes and Accommodation sites, including campsites &
Facilities equipment hotels
Secure car
parking
Source: Hunter Cycling Network, Cycle Tourism in the Hunter Region, Report, Millers
Point, 2005.
These factors are not necessarily connected to each other and therefore require
appropriate strategies aimed at building a unified image, coherent and shared, with the
aim of creating value for the demand of the bicycle tour. This therefore requires the
presence of a network of operators, public and private, acting in synergy to the success
of the initiative, the creation of paths, to the promotion and supply of services,
information, logistics, strictly speaking, hospitality management, organization of
accompanying activities, sports, games, cultural, etc.
The coordination between the various economic actors through two basic steps: the
general organization of the target area system (transport system, tourist offices, etc.)
and the organization of resources available in thematic products / packages that are
able to meet the needs customer. A tourist must first be easily identifiable; hence the
public body role in defining its own tourism strategy for the medium to long term and
then coordinate the tourism offering in synergy with the private players.
This is particularly important and stresses as a prerequisite for developing the link
between cycling and local development is the creation of a system policy, able to
integrate into the same area different natural resources.
Many European countries, Germany, Switzerland, Denmark, and Austria in the first
place, for years have undertaken with conviction the path of the bicycle tourism
enhancement, directing, on the one hand, public investment in the construction of
bicycle routes and creating the other, and a network system of public and private
operators are able to develop significant synergies.
In Italy, although the image of cycling mainly linked to the sports cycling, cycling is a
world expanding rapidly, as will be noted later in this work, thanks to the great
potential that our country offers the excellence landscaping plan. Although Italy
discounts some delay in the development of a network of cycle paths, both in urban
centers and outside, in recent years some regions are undertaking various actions to
respond to a growing demand segment. Pioneering, to that effect, it is the experience of
the Trentino-Alto Adige Region that, since the eighties, has created a dense network of
cycle paths, you think it is for the mobility needs of residents, which cater to the
growing market of cycling. In general, the offer cycling tour in Italy is rather
fragmented and uneven. In some areas, the expansion and modernization of cycling
paths are mostly designed as a tool to promote alternative forms of mobility and more
sustainable for residents and not as an alternative tourist proposal.
Other realities have instead invested in infrastructure for the use of bicycles, to
promote cycling in the first place and consequently the development of the area. In
Fostering Entrepreneurship through CSR 1005
these cases, alongside the development of cycle paths have been built networks of
support services and specific forms of hospitality able to satisfy the needs of cyclists. In
this framework, they insert the product club.
The successful national experiences highlight the importance of its public, which often
acts as an active part in proposing and involve the various local tourism operators. The
synergy between the actors is, however, one of the most critical aspects of the Italian
tourism. The lack of a unified design enhancement of many existing potentials for the
development of cycling as a form of sustainable tourism is, in all probability, the most
critical issue to be addressed.
Only by overcoming the fragmentation of interventions and coordination of the
different actions, even the streets for cycling tourism can become an important driving
force for the development of areas far from main roads of mass tourism but rich in
excellence and potential, activating a virtuous circle between public and private actors.
Essential success factor in this regard is the ability to structure a comprehensive and
complete system of creation / enhancement of cycling networks, which overcomes the
administrative and territorial boundaries, through shared activities and a coordinated
effort. This implies that any cycling project has developed an integrated approach,
involving all the stakeholders, through a unified strategic design.
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Fostering Entrepreneurship through CSR 1007
THE VALORISATION OF “SLOW TERRITORIES” THROUGH THE
DEVELOPMENT OF SUSTAINABLE AND EXPERIENTIAL TOURISM
Enrica PAVIONE
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
enrica.pavione@uninsubria.it
Roberta PEZZETTI
University of Insubria
Via Monte Generoso 71, Varese 21100, Italy
roberta.pezzetti@uninsubria.it
Abstract. The paper intends to propose a first analysis on the potential for development
of sustainable tourism in the so-called "slow territories”, sometimes little-known contexts
that present a significant set of both tangible and intangible resources, often
characterized by levels of excellence. Innovative relationships between agricultural and
industrial realities, processes of enhancement of typical local products, cultural and
landscape heritage represent the hallmarks of these territories, which are grafted on a
strong territorial identity based on reciprocity, trust, bonding with the history and local
traditions. In this context, the “slow” territories often follow an original development
process, by combining local traditions with cultural, social and technical innovation,
allowing growth development paths no measurable through traditional indicators of
growth. In this framework, the “slow territories” represent not only a model of local
development but also a growth trajectory that combines economic growth, social
cohesion, and environmental protection, with a view to sustainability. The distinctive
characteristics of these territories appear so consistent with the changing characteristics
of the tourism market that, especially in recent years, highlights the growth of a
substantial segment of demand more aware and attentive to responsible, sustainable and
experiential dimensions of the holiday.
Keywords: sustainable tourism; slow territories; experiential tourism; local development
models.
Introduction: The territory as a system of resources and relationships
The economic and managerial literature has devoted particular attention to issues
related to the development of territorial systems, starting from the contributions of
Marshall on industrial districts (Marshall, 1920), up to the network concepts and
corporate networks (Rullani, 1996; Staber, 2001), with the goal of understanding the
factors capable of promoting the economic development process (Porter, 1985).
From this point of view, the importance that local areas play in determining the
characteristics and quality of development is widely recognized. The active role that a
territory has in guiding economic development based on the fact that it will build over
1008 Strategica 2016
time historical, cultural and social factors that are the basis of the models of
organization of production and therefore of economic and social change processes of
the area itself.
In the light of these considerations, are gaining in importance is the spatial dimension
that the temporal of the territory, due to the fact that it is the result of a continuous
evolution of resources and actors that, in a certain space, bring into being activities and
relationships.
This means that the territory is not statically expressed only in terms of infrastructure
resources, but it represents a place where geographical and physical elements are
linked to all other factors (social, economic, institutional, etc.), in a dynamic
perspective. In addition, the complex network of relationships and interactions
between the different entities that make up the territory, interactions that determine
the evolution of the territory itself.
This development constitutes the territory as a viable system (Golinelli, 2000), in a
tangle of dynamics involving people with a variety of interests often difficult to
reconcile. Actors, resources, and activities are independent factors, the nature of which
depends on the mutual interactions that develop over time.
From this point of view, the territory can be seen then as a fundamental factor for the
development and competitiveness of enterprises, where they originate relations and
exchanges of information and knowledge. Beyond the individual contributions
expressed from the large literature on the subject, what is relevant is the land given as
a set of resources and relationships that involve all the stakeholders, allowing it to
settle in the same area resources, experience, and knowledge in a perspective of
overall development (Barile, Saviano, Polese & Di Nauta, 2013). It follows that the
development potential of a territory are strongly linked to the way in which they
manifest concretely the interactions between actors, resources, and activities.
Among the resources of the territory, those materials are the “envelope” of the same
territory and could be important elements of differentiation of its offer. They are the
result of natural conditions of an area and its evolution over time. Intangible resources,
equally important to characterize a territory, derived from evolutionary paths
traversed over time by a territory and its actors and are therefore strongly sedimented
and hardly replicable and transferable to other contexts. Factors such as the system of
common values, lifestyles prevalent, the level of entrepreneurial skills, reputation and
the perceived image are peculiar and inherent resources to the territorial system of
which they are part (Caffyn, 2012).
The set of tangible and intangible resources configures the quality of the assets in
which an area is proposed, and hence its competitiveness depends on. The
attractiveness and potential for development of a territory are derived primarily from
the way in which these resources are linked and integrated into a unified and coherent
vision. From this interaction, it arises what is called the vocation of a territory, very
complex concept, which can be expressed because of evolution over time of the
tangible and intangible heritage resources and institutional structure, social and
economic, production of the same territory.
Fostering Entrepreneurship through CSR 1009
Confer value to available resources is the process by which one realizes the local
development strategy. The resources, in fact, are the pivot on which to rotate the
vocation of the territory. In the medium to long term, the vocation can become the
basis for the productive specialization of the territory and tends to persist over time
when the local community will be identified, resulting in a strong rooting and
territorial identity. In other words, the specificity of a place that makes up the
territorial vocation has its basis in the strong sense of identity of the local community.
In this sense, the vocation is the starting point for the definition of a territorial
development strategy, since it expresses the natural evolution of a territory, the
consolidated guidelines of its actors, the peculiarities that may be more attractive.
Consequently, the government body in charge to guide the long-term strategy of a
territory has the primary task to enhance the wealth of resources, since its vocation.
This is to increase the attractiveness and consequently its competitiveness.
Competitiveness which is then to be dependent on several factors: environmental and
structural factors, intangible resources such as social capital, trust, and innovativeness,
the policies adopted by the institutions and by individual operators, the same
behaviors of the actors involved (Buhalis, 2000; Poon, 1993). The competitiveness of a
territory also derives from its ability to promote the competitiveness of the actors who
are part of. More, in particular, it must be understood as the ability to activate the
conditions that allow the same territory to acquire and strengthen the value that it is
able to offer to certain categories of subjects. Consequently, it is dependent on its
ability to outline a strategy to enhance and enrich the heritage of tangible and
intangible resources present in it. It is therefore to outline a virtuous circle in which
the competitiveness of a territorial system is manifested in its ability to promote the
competitiveness of the actors who are part of it, through the development and
enhancement of existing resources and the ability to attract outside resources. At the
same time, active actors on a territory are those whose presence and activity on the
territory itself favors the evolution according to the chosen development model, thus
helping to enrich the heritage of resources.
In the light of these considerations, it is evident that the exploitation of a territory
steps through the implementation of coherent project bidding with its vocation and
with the opportunities that exist within it or through a change project that, starting
from the vocation, grafts innovative elements in offering land.
The peculiarities and prospects for development of the “slow territories”
The sedimentation of resources and specific expertise in a particular territorial reality
is the foundation of those which are increasingly being defined “slow” territories or, in
some cases, minor territories (Mutti, 1998; Lancerini, 2005; Folorunso & Ojo, 2013).
The meaning “slow” or “minor” should not be referred to a situation of delay or
backward, or to merely rural provincial areas, but to a development approach away
from the traditional model of Fordist growth, oriented primarily to the quality of the
territory and lifestyle. It is, in fact, low geographic density areas, which have a
significant rural setting, from a business fabric made from quality companies on a
territorial basis and an important heritage of tangible and intangible resources (art,
food and wine, landscape, etc.). These contexts are not well known, but often contain a
1010 Strategica 2016
significant heritage of excellence. Their common feature is the high landscape quality
that, combined with the local history and traditions, configure these areas as real
cultural districts (Dickinson, Lumsdon & Slow, 2011; Caffyn, 2012).
The distinctive features of the landscape, which is one of the elements most qualifying
“slow” areas, are linked to a non-quantitative growth in terms of the built environment,
but looking for hospitable spaces, away from the spectacular architectural design
(Lanzani, 2005). In the model of development of the “slow territories”, which favor the
production chain, the landscape becomes the glue for the actions of the different
players of the territory and for sectoral policies.
The “slow” territories are not therefore a model of local development, but a growth
trajectory that combines economic growth, social cohesion and environmental
protection (CST, 2009; Pink, 2008), in terms of sustainability. This logic implies a
different development model than the one based on production and technical and
research accelerated times of different life rhythms, more connected to nature and the
environment. Some authors speak, in this regard, the soft economy, to indicate an
economy based on knowledge, identity, history, creativity, able to combine social
cohesion and competitiveness and to draw strength from the community and from the
territories (Cianciullo & Realacci, 2006).
In this perspective, the territory is the central competitive factor, since it is the area
that develops and consolidates identity and collective interests, leveraging the
widespread responsibility, they can act as an engine of development. In this virtuous
growth circuit, the main actors are the industrial manufacturing base of territorially
based quality, linked to the land agriculture, the third sector, tourism (Parra, 2010).
The “slow” areas are as capable of mixing rural and urban aspects traits, developing
original growth trajectories in multi-sector perspective that makes these territories
with more development engines (Michael, 2000; Miele, 2008; Lumsdon & McGrath,
2011).
In this perspective, the territory is the central competitive factor, since it is the area
that develops and consolidates identity and collective interests, leveraging the
widespread responsibility, they can act as an engine of development. In this virtuous
growth circuit, the main actors are the industrial manufacturing base of territorially
based quality, linked to the land agriculture, the third sector, tourism. The “slow” areas
are as capable of mixing rural and urban aspects traits, developing original growth
trajectories in multi-sector perspective that makes these territories with more
development engines (Rizzo, 2016).
The polyvalent nature of this development implicates a new approach to the
measurement of its various aspects. In particular, it assumes importance the search of
a method of multidimensional evaluation of the development that allows gathering the
different factors that compete to the formation of the comfort and the quality of the life
(Sen, 1999; Stiglitz, Sen & Fitoussi, 2009).
Innovative relationships between agricultural and industrial realities, processes of
exploitation of local products, cultural heritage, and landscape are the distinctive
features of these territories, which are grafted on a strong traditional identity, based
on reciprocity, trust, attachment to the roots (Fukuyama, 1995). It is precisely because
Fostering Entrepreneurship through CSR 1011
of these characteristics that the territory can become a promoter of quality districts,
based on the exploitation of local roots, the landscape, and the communities. In these
territories, values such as reciprocity, knowledge of local conditions giving, trust three
people and businesses are the features characterizing the economic and social logic.
The intertwining of local communities, land, and businesses, where the quality is the
common denominator in these territories gives uniqueness, a uniqueness that
becomes their true competitive strength.
Some strands of studies recognize in these traits typical areas of industrial districts
(Visconti, 1996): the presence of a population of small and medium-sized enterprises
among which are established cooperative relations, the geographical boundaries, the
existence of a people carrier of a system community fairly homogeneous values and
territorial identities.
In recent years, the “slow” territories have initiated an intense process of construction
or reconstruction of a local identity, which gives renewed value to the share capital, to
fiduciary relationships, traditions, lifestyle, and sustainability. These contexts have
become witnesses of an active land policy, understood as the construction of local
areas with a high quality of life, relying on the recovery and enhancement of the
individual features, attention to the environment, the ability of cultural resources,
crafts, landscaping, etc. to narrate the history and local tradition.
Slow territories and sustainability
At the center of the development policies of the “slow” territories, especially in recent
years, there is only competitiveness, but increasingly the habitability and sustainable
development (Giaoutzi & Nijkap, 1993; Evans, Joas, Sundback & Theobald, 2006;
Roberts & Simpson, 1999).
The idea of physiological evolution of the territory, consistent with the concept of
sustainability, refers to the definition of sustainable development offer in the 1987
Brundtland Report: our common future, the direction of investments, the orientation
of technological development and institutional changes are harmonized so as to take
into account both the present necessities, that of future generations.
Sustainability is, therefore, a concept that encompasses three components: economic
growth, dynamic balance of the environment, social cohesion and inclusion. Each of
these components is divided into a number of specific conditions that take on a
different significance in relation to the particular model of sustainable development
that a given territory intends to follow and which have been identified by the United
Nations Environment Programme (UNEP).
With regard to the environmental component, the management of a territory and the
use of the resources available to go in the direction to simultaneously optimize current
results and enrichment or at least the maintenance over time of the wealth of
resources available. In terms of environmental sustainability, they are now
consolidated several instruments: the local Agenda 21, reporting and environmental
accounting, environmental appraisal systems, urban planning at different levels. In this
sense, and with particular reference to the “slow” territories, the concept of
1012 Strategica 2016
sustainable development is to be superposed on the sustainable landscape, it
understood as the ability to preserve the quality of natural and environmental
resources, as a pillar of a new concept of well-being. In essence, the management of a
territory increasingly aims to enrich or at least maintain over time the wealth of
available resources. This means that their use must be done in ways that favor its
replicability over time or at least limit its depletion.
In a wider perspective, which also includes the social, land management aims to
achieve a number of conditions (Caroli, 2006): a proper balance in the satisfaction of
the interests of all stakeholders, the participation of all stakeholders to the benefits
arising from the economic development of the territory , the extension of opportunities
for access to factors of economic growth, social and cultural development for all people
and social groups, the gradual reduction of economic development and social
differences between the sub-areas that comprise the territory. It should, however, be
stressed that in terms of social sustainability, the rule structure is less developed in
territorial systems. The economic and industrial policy choices made by the governing
bodies have a fundamental influence on the degree of social sustainability with which
we see the economic growth of a region (Lancerini, 2005).
The conditions for the sustainable development of a territory pass through the
synergistic integration of the three dimensions, economic, social and environmental.
The synergistic balance between the different components of sustainability is achieved
operationally by several means, an organization of territorial spaces and particularly in
production plants, the development of community welfare systems, the promotion of
lifestyles and ways of organizing the human activities. In this framework, there is also
the search for different rhythms and lifestyles, which can become a political and social
project of growth.
The promotion of lifestyles oriented to waste reduction and reuse of resources, as well
as models of organization of production activities that go in the direction of an efficient
use of resources are just some examples of local policies aimed at sustainability.
Sustainable development of a territory is, therefore, the result of certain territorial
government choices, made by defining a balance between economic development
strategies, ecological, cultural and social. The integration of economic, environmental
and social requires a complex process of involvement of all stakeholders, public and
private, operating in a territory, in a systemic long-term vision. Such passage, as will be
noted later in this work, it is crucial to ensure a territory a sustainable development
trajectory over time
In the management strategies of a territory and as part of an increasing focus on
sustainability, the assessment of an activity such as tourism, which more than others
interested in natural areas, cultural and social, establishing a composite relationship
with the environment, assumes a central significance.
The “slow” territories, which were characterized by the ability to enable development
paths quality oriented consistent with their vocation, are presented as actually
potentially very attractive to tourists who are looking for quality experiences, pleasant
places, and traditions, far away from the highly urbanized contexts. The development
Fostering Entrepreneurship through CSR 1013
of territories “slow” in the direction of strong recovery of identity and sustainability is
consistent with the changing characteristics of the tourism market, especially in recent
years, it shows the growth of a substantial segment of the application seeking an
experiential holiday away from the more traditional routes, in the choice of which is
gaining greater weight to ethical and environmental variable. In this context, the
promotion of tourism, if able to integrate the three dimensions of sustainability,
environmental, economic and social, may be a response of the smaller destinations to
competitive challenges that they are facing (Giaoutzi & Nijkamp, 1993; Turnock, 2002).
In this perspective, the “slow” areas can be configured as true tourist districts, whose
peculiarity is based on the specialization of enterprises not for the production phase,
but for the product, in the case of companies whose output will be included in the
overall tourism product. Thus, the territory-district assumes the characteristics of an
organizational entity characterized by both companies specialized in tourism activities,
both from a set of environmental, cultural, artistic, etc. which make that vocation for
tourism territory (Lazzaretti & Petrillo, 2006).
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1014 Strategica 2016
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Towards Sustainable Public
Organizations
Towards Sustainable Public Organizations 1017
TOWARDS SUSTAINABLE TOURISM DEVELOPMENT
Mirela MAZILU
University of Craiova
13 Alexandru Ioan Cuza Street, 200585 Craiova, Romania
mirelamazilu2004@yahoo.com
Daniela DUMITRESCU
Valahia University of Târgovişte
2 King Carol I Blvd., 130024 Târgoviște, Romania
danieladro@yahoo.com
Amalia BĂDIȚĂ
University of Craiova
13 Alexandru Ioan Cuza Street, 200585 Craiova, Romania
amalia.badita@gmail.com
Abstract. The existing EU framework for the development of economic, social and
environmental policies based on the Partnership for Growth and Jobs and the Sustainable
Development Strategy provides an adequate background for achieving Objectives on the
sustainability of the European tourism and challenges to be addressed to objectives of
this “agenda”: economic prosperity, social equity and cohesion, protection of the natural
environment and culture. These objectives should also guide European tourism
stakeholders in their policies and actions affecting the impact of outbound tourism from
Europe and in supporting tourism as a tool for sustainable development in host countries.
To achieve these objectives, a number of tourism-specific challenges need to be addressed.
Stakeholders should continue to anticipate and monitor changes. Policies and actions
must take into account how demand and offer will be affected by environmental
challenges – such as climate change and water scarcity–, technology developments or
other current political, economic and social issues. Therefore, all challenges will be
regularly updated in conjunction with all stakeholders. Achieving the objectives of this
agenda and addressing the above challenges will require consistent action that can be
supported by appropriate public policies: sustainable management of destinations, the
integration of sustainability in the business environment and tourists’ awareness of
sustainability. In a competitive global and more and more developed market nowadays,
there is a great need for a powerful national branding of tourism management that could
optimize the resources, could concentrate on a nucleus the interests - the public and
private sector, the national, local and regional sector - and capture the tourists'
attention. This will need a certain type of interest for a coordinated approach to
marketing and distribution through the internet in order to optimize the vision on
Romania.
Keywords: Tourism; innovation; economic benefits; impact; sustainable development.
1018 Strategica 2016
Introduction
Despite all the “attacks” on the image of European tourism, the economic crisis, the
immigrants crisis, the terrorist acts occurred on undeniable destinations (Paris and
Istanbul, most recently Ankara), it is encouraging the fact that Europe remains the no.
1 tourist destination in the world with a market share of 52% in 2015, (directly and
indirectly) generating 9.7% of the total GDP of the 28 EU countries, figure expected to
rise to 10.4% by 2025.
A European destination of excellence, a well-deserved title won in 2008 following a
pilot project of the European Commission, the Danube Bend, a blessed area in the
South-West of Romania, is looking for a tourist image brand from the family of eco-
friendly tourist destinations.
For this, the resilience of this destination due to the poor condition of some vital
elements needed for a quality tourism act, such as poor infrastructure, with numerous
and too often unforeseen (most recently, in February 2016, resulted in blocking the
road by rocks, leaving the residents of 5 villages of Bend without electricity) and
especially undesirable (floods, landslides, etc.) events, the minimum existence of
spaces for entertainment, the Danube Bend wins instead due to the geo-diversity of the
natural attractions, unique to the European destinations, which annually attracts
thousands of tourists from the country and abroad.
Destination image
Attitudes, perceptions, and images have an important role in the decision to choose a
tourist destination. The image is the sum of perceptions and beliefs that people have in
relation to that destination (Stăncioiu, Părgaru & Mazilu, 2009). The image of a
destination is not necessarily based on prior experience, i.e. a visit to that destination.
All tourist destinations have a self-image and the marketer’s interest is to clearly
distinguish it from other destinations. The Oxford Advanced Learner’s Dictionary
defines destination image as “an impression that a person, an organization or a
product gives to the public and/or a mental picture that you have of what something is
like or looks like” (Hornby, 2011, p.748). The destination is a mental image formed by
exposure to destination attributes (Baloglu, 1999; Baloglu & McCleary, 1999) and
United Nation World Tourism Organization (UNWTO) define tourism image as “ideas,
conceptions held individually or collectively of the destination”.
The Romanian tourism offer will be primarily promoted in Germany, Italy, France, USA,
Hungary and the UK. The Government has recently approved, by a memorandum, the
Master Plan developed by the World Tourism Organization (WTO), and the money for
tourism promotion are to be directed mainly towards the countries where most
foreigner tourists come from, such as Germany and Italy, or to those on whose market
Romania has a great growth potential, such as the USA. The change is very significant
because until recently the Romanian state did not spend huge sums to promote
Romanian tourism on markets where the offer was a rather doubtful success.
The ability to identify and promote value is the main factor of long-term
competitiveness of the society (Mazilu, 2010). This requires to accurately and
Towards Sustainable Public Organizations 1019
realistically identify areas where there are prerequisites for performance and to
stimulate the development of quality related to these areas, to identify valuable
individuals and their areas of excellence, followed by channeling to education and
training in line with their natural inclinations to harmonize their interests with those
of the society.
In conclusion, the competitiveness of a destination (Cândea et al., 2009) is given by the
rate at which it manages to exploit the valuable human heritage with which it is
naturally equipped. This has two major components: mass education, training, and
predisposition channeling, creating the conditions for the individual to manifest in that
area. Although economically speaking the concept of competitiveness in tourism
defined as “the ability to cope with competition in an effective and profitable manner
on the tourist market” (Mazilu, 2010) incorporates that used in the literature, tourism
specific content makes necessary a complex and multidimensional approach to this
concept. This is necessary considering some particular aspects of the tourist product.
Firstly, we must emphasize that the multitude of components involved in designing
and marketing a tourist product have made the achievement of its competitiveness to
be a complex process in whose ensuring contribute: both the competitiveness of
destination / resort, and the one made at each type tourist business: direct provider of
tourist services: transport, accommodation, food, recreation, treatment, or
intermediary: tour operator, travel agency, etc.
To this is added the fact that, from the tourist’s point of view, the product covers the
complete experience of leaving home and up to the return (Stăncioiu, 2003), being
sufficient that weaknesses manifest in a single component for the overall level of
competitiveness to be affected. We must also highlight that often a tourist destination
overlaps or is near a local community: a city or rural settlement whose economic,
social, cultural life influences more or less tourist activity, being in turn influenced by
it.
All these aspects highlight a large number of determinants that influence the
competitiveness of the tourist product. Therefore, out of theoretical considerations,
tackling the competitiveness of the tourist destination and tourist business will be
made distinctly, although between the two there is mutual interdependence and inter-
condition. A tourist destination cannot be competitive in the absence of competitive
tourist businesses, while a tourist business cannot be competitive in an unattractive
tourist destination. As a result, ensuring the competitiveness of tourist products and
services must be based on quality management, it being a way to ensure
competitiveness and hence business market credibility. “Professionals” in
communication considers unanimously that any country’s international advertising
campaign, whether it sells economy tourism or culture, is useless in improving the
image, as long as the “product” is not competitive.
Competitiveness in tourism
Competitiveness in tourism should be treated in the new terms of globalization of
economic life, highlighting the crucial elements that can influence and can become
competitive advantages for Romanian tourism. The competitiveness horizon of
1020 Strategica 2016
Romanian tourism is inextricably linked to elements of the strategy adopted by the
Government through the National Tourism Authority, local governments, each
economic agent. Starting from such an approach, we have defined and outlined two
notions that those involved in the tourism industry must learn and at the same time
apply to produce competitive market services such as competitiveness in tourism
management and marketing.
Competitiveness in tourism suggests safety, efficiency, quality, productivity,
adaptability, success, modern management, superior products, low costs (Mazilu,
2010). The competitive strength of a company lays in competitive advantages and
distinctive competencies it possesses relative to other competitors. The success of
travel agencies and others is determined by the process of attracting, winning,
satisfying customer needs, and by gaining their loyalty, which is a key to quality of
services / products offered; only in this way will the company get the expected profit.
The essential aim of quality management is to achieve in conditions of maximum
efficiency and effectiveness of only those products that: fully meet customer
requirements, comply with the requirements of society, comply with applicable
standards and specifications, take into account all aspects of consumer and
environmental protection, are offered to customers at the price and time agreed with
them. Introducing a quality system benefits all parties involved: the country as a
destination, entrepreneurs, consumers, and intermediaries. This includes ensuring a
constant level of quality.
Therefore quality implementing is achieved by a set of requirements called standards
and grouped by type, depending on the area in which they operate: performance
standards, service standards, referential professional standards, standards that include
specifications, standards with operating procedures (operational).Achieving quality
does not involve only developing some standards and ensuring compliance with them,
but quality performance should lead to requirements satisfaction and customer
expectations on quality management.
In this context, the systematic analysis of quality of tourist services / products and
taking the necessary measures is a priority of utmost importance at this stage.
Destination competitiveness – As a tourism product
Ensuring the competitiveness of tourist products is the quintessence of the process of
achieving competitiveness in tourism. This is both the result of the competitiveness of
providers directly involved in the production of tourism services included in the
package, as well as of other determinants that have a bearing on the competitiveness of
the tourist destination.
In this sense, marketers have defined the concept of “product universe” which
summarizes very well these influences. Thus, the tourist product universe is
represented by “the sum of perceptions that the tourist has concerning the product:
visual images: colors, ambience, geographical and physical environment, atmosphere,
smells, musical sensations, human relations (with the personnel, other tourists,
people), comfort level, etc.” (Ambiehl, Aujaleu & Gallienne, 2002, p.18).
Towards Sustainable Public Organizations 1021
A product / service is competitive when it has the ability to impose itself on a particular
market, to sell in large quantities comparable perhaps with those of similar products
or services produced and sold by competitors (Rondelli & Cojocaru, 2005). As a result,
the tourism product design is not confined to the combination of multiple variants of
the two categories of elements: tourist resources and services, but also requires a
certain concept about the product.
The ever-growing demands that tourists have to travel products have imposed a series
of attributes that a tourist product must meet for it to be competitive: satisfaction,
accessibility, legitimacy, security, and safety, authenticity, transparency, harmony with
nature, in their achievement bringing their contribution alike both competitiveness of
each tourist service provider to the tourist destination and other competitiveness
determinants of tourist destination (Cândea et al., 2009).
The differentiation firstly results from the value chain of the destination as tourist
business (Figure 1). As with any product, also in terms of tourist product, the value
chain must be analyzed from two perspectives, namely: the business’ value chain and
the buyer’s value chain.
Figure 1. Destination value chain as tourist business
From the business’ perspective, the value chain includes the margin value and the value
activities, each of which being a potential source of uniqueness. In turn, value activities
(classified into primary and support activities) are divided into direct, indirect and
quality assurance activities.
The evolution of the concept of quality, from quality assurance to total quality
management, has required the use of working methods and procedures in all
departments and at all the levels of the tourist product, with the establishment of
indicators for all factors “creating satisfaction” (from quality ingredients for making
food, respectively the quality of the linen cloth, up to the “quality of the destination”,
this also including service provider staff quality).
In other words, the concept of quality, approached from the perspective of the supplier
/ provider, found in all value-creating elements, is found in the form of the element of
satisfaction for the buyer (e.g., degree of comfort - for accommodation, nutrition / taste
value - for food, equipment degree, competence, etc. - for the destination as a whole).
These, combined with the attractive natural resources, not necessarily unique, and
1022 Strategica 2016
constantly referring to the needs and desires of the market / markets that they wish to
aim, lead to the differentiation of the destination with sustainable competitive
advantages.
Value creating elements - from the perspective of the supplier / provider, transformed
throughout the consumption of “a tourist product, viewed from the perspective of the
buyer, in elements determined for satisfaction, compose inter alia the image of a
destination.
The image of a destination is the sum of information and impressions submitted to
potential consumers about the population, infrastructure, climate, history, attractions,
personal safety, etc. (Echtner & Ritchie, 1991) and is formed by perceptions and
experiences.
Since the sense of sight is predominant in forming a positive image, the visual
perception of a destination can be decomposed, for a deeper understanding of the
attributes / variables of differentiation that form the atmosphere / ambiance, in an
artistic image and a psychological image. Thus, intangible factors such as good weather,
nature / scene, accessibility, turned into tangible elements, that is the pleasant
environment, relaxing ambiance, infrastructure, can create an artistic image favorable
to the tourist choosing the destination. Intangible elements such as local culture, the
diversity of sports activities, restaurants, cafes, etc., which can increase the value of a
destination, turned into tangible elements, namely historical sites, events (cultural
events, festivals, etc.) form an environment in which there are “lots of things to do”,
and may create a favorable psychological image for the tourist returning to the
destination. Transforming these attributes into benefits for the tourist, by which a
destination can be differentiated, is held in a positioning strategy.
Besides the differentiating variables “product” and “image”, for a tourist destination
other variables are also used (e.g., staff, a variable that can increase or decrease the
value of the tourist product offered) (Pârgaru, Mazilu & Stăncioiu, 2009). The
destination identity is “the principal means of identification, but also the source of
associations made by the consumer, which represent the links between values and
brand” (Lindstrom, 2009). In the case of a tourist destination, the identity elements are
those which are constituted most of the times in attractiveness elements (which add
value and / or uniqueness to the destination) and, at the same time, in main motivation
for choosing it. Criteria for choosing a destination depend on how it is perceived,
namely the image that the consumer has established about it; at the same time,
evaluation criteria of the quality of destination are also considered.
Seen from the perspective of the buyer (from the target-market to destination), the
value chain consists of actual or perceived values, through which one can distinguish /
choose a destination. Differentiation, in its most lasting form, results from the creation,
in a unique manner, of a value for the buyer (Porter, 2001), namely criteria for
purchase. They are classified, in turn, in criteria for use and criteria for reporting.
Criteria for use “measure” / assess the factors / elements that create value for the
buyer, while the criteria for reporting reflect how customers perceive value, meaning
that they are normally under the conditions of applying an effective marketing for the
criteria for use.
Towards Sustainable Public Organizations 1023
Among the criteria for use are product quality, product characteristics (physical and
geographical), and length of stay means of transport, etc. Among the criteria for
reporting also important are image / identity / reputation of destination, market share,
tradition / seniority in the field, the price as an indicator of quality, product
appearance, etc. Another criterion for reporting is only important insofar as it
contributes to the real perception of the value of the “acquisition” made by meeting
criteria of use (Porter, 2001, p.78).Among the sources of sustained competitive
advantage, mentioned in most of the literature (Porter, 2001, p.167), important are a
distinction, quality (value chain and system), cost reduction, niche marketing,
performance or advanced technology, management manner, culture and style of the
organization. Because of the specificity of the tourist product or products (which, in
turn, are composed of a multitude of services) that make up destination or are
identified with it, and, namely, the existence of two types of constituent, base – natural
and anthropogenic (reason for the company will work with comparative advantages
resources or competitive advantage resources) resources, relevant for destination
management are its differentiation and quality, the others being slightly included (cost
reduction, culture, management style and organization manner) or determined by the
two (marketing niche, performance, and advanced technology).
Increasing competition in terms of price and better and cheaper organized network of
destinations from other continents accentuates the pressure on the European tourism
sector and its traditional destinations. More destinations are competitive in terms of
experience, and competition is strengthened by a greater market transparency in
terms of prices and / or other characteristics comparable of destinations.
At the request of tourists to purchase products / services at prices permanently
related to the level of offer, operators respond by increasing optimization of the quality
/ price ratio.
In this context, classical small and medium tourism enterprises are forced to fight for
survival with the integrated competitive destinations, which working with world-class
professionals of tourism, having a strong and functional organization and being able to
achieve significant savings, superior to those of any small, isolated company. On the
other hand, these small enterprises, in order to cope with increasing pressure, should
move toward cooperation, innovation, specialization and creation of branded, high-
quality products.
There are many studies that talk about the "anonymous state" in which our country is
sinking, in terms of international tourist identity, of the symbols that define us. We
never really knew how to become visible by what is individual to us, and not
necessarily because we are missing features, but because it is possible that even we do
not know, or no longer know, what really sets us aside. There have been many
initiatives, some recent and expensive, to create and promote a brand of country,
based primarily on tourism, but they have not had the expected impact.
Why? There are many reasons that can be mentioned, but one that should be
considered as essentially beyond political games and arrangements, the poor
communication and decision implementation, is perhaps the simplest and is therefore
overlooked: do we know today what essentially represents us? Do we have an element
/ several elements that instill a lasting image, not temporary, for Romanian rural
1024 Strategica 2016
tourism? Are adventure, culture, village traditions, gastronomy, authenticity, tourist
identity elements, for the Danube Bend - village part of tourist offer? What symbols,
values, ideas, feelings, places, emotions, characters, cuisine, and artistic expressions par
excellence really Danube Bend destination?
There are many conceptual approaches about Danube Bend image destination (Figure
2).
Figure 2. The tourism image - different conceptual approaches (Bădiță, 2013)
According to Bădiță (2013) for every tourist destination, the tourist image plays an
important part that serves to strengthen the connection between the visitor and the
destination of choice; Henderson (2007, p.262) defines the destination image as
“multidimensional”, with cognitive and affective spheres (...) an amalgam of
knowledge, feelings, beliefs, opinions, expectations and impressions that people have
of a particular destination”. Crompton (1979, p.18) provides an integrated definition of
the tourist image as a sum of beliefs, impressions, ideas and perceptions that people
have of objects, behaviors, and events.
When a tourist discovers a destination, the overall image and the tourist image may be
affected. Thus, the concept is a pertinent one since tourism can offer the single best
opportunity to correct misunderstandings. Thus a connection arises between the
resident and the tourist who form a certain type of tourist image about a certain
tourist destination (positive, negative or neutral), which generates a certain behavior,
attractiveness, indifference or aversion to that place (Bădiță, 2013) (Figure 3).
Towards Sustainable Public Organizations 1025
Figure 3. Relationship between residents/tourists, tourism image and types of
tourist behavior (Bădiță, 2013)
Thus there is a series of factors which may push people into wanting to go on holiday
to that destination, based on psychological, membership considerations or gaining
knowledge, and the image, as a strategic management tool, can pull people to choose a
destination, leading to the creation (construction) of a primary image of the destination
(Bădiță, 2013) (Figure 4).
Figure 4. The tourist image building and dissemination (Bădiță, 2013)
Some theoretical approaches of the image believe that this can be pre-determined and
shaped by personal and current experiences (Bădiță, 2013; Crompton, 1979;
Gheorgheci & Mazilu, 2015). The research and understanding of present tourists
provide a base of information from which one can build and customize marketing and
tourism services.
1026 Strategica 2016
Regarding the role of national or local public policies and initiatives in the
strengthening and the promotion of tourism and competitiveness in the interests of
citizens and the community as a major customer, in terms of creating economic and
social value for society, Romania is also carrying out as a priority European programs
aiming at increasing the competitiveness of tourist destinations. At the level of the
local community, the Danube Bend, as President of the Mehedinti Association to
Promote Tourism, since 2008, following a Pilot Project of the European Commission,
has obtained the third rank, following the “Destinations of excellence” national
competition, which honored us and, above all, required us to maintain the increased
competitiveness of this destination. Regarding the creation of economic and social
value for the community of the Danube Bend, the effects of these programs are
constantly reflected in the increasing flow of Romanian and foreign tourists to the
Danube Bend.
Figure 5. Diploma for a European Destination of Excellence/2008
Conclusions and implications
The image of the Danube Bend destination over time depends heavily on the
involvement of this trio: tourist - tour-operator - local population of the
destination, a trio that should join efforts and especially creativity, coupled with
passion, to analyses brand image that fits the Bend, to make it regionally and
internationally visible, along with a promotion targeted on the strong attributes of this
complex potential of this destination.
We do not know if the optimism of a tourism researcher does not, actually, mean to
believe that everything is easy and “will solve out of nothingness” immediately, but it
also means to be convinced that any problem can find its solution to approach things
positively, towards sustainability, because the ones who love this destination want to
be able to take out grandchildren and have the same motivation, that of the tourist who
loves and knows how to appreciate a unique tourism product across Europe. In this
case, we, who work in tourism, are also responsible for providing a destination image
to the extent of what it offers us with gratitude.
Towards Sustainable Public Organizations 1027
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1028 Strategica 2016
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Towards Sustainable Public Organizations 1029
DEVELOPMENT OF THE ROMANIAN CITIES BASED ON A EUROPEAN
SMART CITY CONCEPT
Florin NEMȚANU
Politehnica University of Bucharest
313 Splaiul Independentei, Bucharest, Romania
florin.nemtanu@upb.ro
Marius MINEA
Politehnica University of Bucharest
313 Splaiul Independentei, Bucharest, Romania
marius.minea@upb.ro
Dorin BURETEA
Politehnica University of Bucharest
313 Splaiul Independentei, Bucharest, Romania
d3orin@yahoo.com
Ilona COSTEA
Politehnica University of Bucharest
313 Splaiul Independentei, Bucharest, Romania
ilona.costea@upb.ro
Abstract. At the European level, a new concept and a new direction in city development
are arising based on new technologies and new approaches of urban life, this being called
“Smart City”. A city becomes “smart” when the city management and the citizens employ
smart strategies, smart tools, smart technologies and smart results of applying to all
smart things in the urban area and to the area influenced by the city. The authors present
the state of the art in terms of conceptual approach as well as in terms of technological
approach at the European level with the goal to move Romanian cities towards this
target based on European recommendations and experiences. The authors have
developed a methodology for smart city modeling as a reference for future urban
development. Based on this methodology the target or reference model will be compared
with a real model of the city in terms of discovering necessary actions to fill the gaps or
differences between models. The paper is focused on the smart mobility component of the
city and authors performed a correlation between the different components of the smart
city and among the high-level functions of smart mobility. The paper is concluded with
some recommendations and future research activities to elaborate a more detailed model
employing software tools (for instance, Matlab and Simulink) and including more
variables.
Keywords: Smart City; mobility; intelligent transport systems; ICT and urban
development.
1030 Strategica 2016
Introduction
Pollution and the transformation of the natural environment are two important issues
and urban area has to solve the problems generated by them. Smart solutions are now
the best approach in solving these problems. The application of these smart solutions
in the context of a city was launched a few years ago and the new concept is called
Smart City.
The smart city concept could be a good way to reach the objective of the city in terms
of providing a high level of the quality of life in the urban area as well as a high level of
economic context for regional and national development. The city has to be analyzed as
a complex system with various components and the relationship between them
(Neirotti et al., 2014). This concept is approached in Urban Agenda - in strategic
initiatives of the European Commission and many regional and national initiatives are
going to support it (European Urban Agenda, n.d.). The European Union, as well as the
member states, is involved now in the development of this concept and in finding the
best models and practical tools to improve the administrative process of cities in a
smart manner.
A simplified model of a smart city was elaborated in the project Smart Cities
(“European Smart Cities,” n.d.) and the main 6 components of this model are presented
in Figure 1. Several European projects and several scientific articles support this
concept and there is a special request in the elaboration of a new model based on the
existing urban systems and existing technologies in terms of filling the gaps between
the city and new concept, called the smart city. The main issue is the existence of a
huge gap between the theoretical concept and a conceptual tool for real applications in
urban areas.
One important topic for the smart city and smart mobility in cities is the intelligent
transport system. The European Commission is focused on Intelligent Transport
Systems (ITS) as a main instrument, which is able to support urban policy goals in
different areas such as travel and traffic information, traffic and demand management,
smart ticketing and smart payment or urban green and smart logistics. The focus is to
be on the citizen and the integration of all ICT and ITS could be a solution for urban
mobility-centered on citizens. Action Plans on ITS and on Urban Mobility are the best
policy documents which support the EC approach (the ITS Action Plan has the main
objective in setting up an ITS collaboration platform to promote ITS initiatives in the
area of urban mobility and the Action Plan on Urban Mobility offers assistance on ITS
applications for urban mobility). With the Urban Mobility Package, the EC reinforces its
supporting measures in the area of urban transport by:
- Experiences, best practices, and cooperation
- Financial support,
- Research and innovation for urban mobility challenges,
- Involving the Member States and enhance international cooperation.
“Together towards competitive and resource-efficient urban mobility” Com (2013) 913
– defines the concept of sustainable urban mobility plan and the main results of the
project are subordinated to this new concept of Sustainable Urban Management Plan
(SUMP) as a main urban management tool (European Commission, 2013).
Another important European initiative created more than 10 years ago, which is
Towards Sustainable Public Organizations 1031
supporting the development of the smart city concept - Eltis - represents now Europe's
main observatory on urban mobility. It is financed by the European Union under the
Intelligent Energy - Europe (IEE) Programme. Eltis provides the information, good
practices, tools and communication channels needed to help to turn cities into models
of sustainable urban mobility.
The authors have developed the concept presented in this paper based on some
European strategic documents and one example would be the City and Innovation
Manifest (stated during The City Innovation Summit Barcelona 2014), which is a good
start in terms of turning on an innovative approach to urban mobility.
A good experience was gained from SMARTCITIES project (funded by Interreg North
Sea Programme) especially on establishing networks (academic, public authority and
industry), citizens oriented projects, and the paper extracted these orientations for a
better modeling process. Another important European project, which has constituted a
base for the approach presented in the paper, is Smart-Cities of TU WIEN and its main
result, the model of European Smart City (as well as benchmarking procedure for
smart cities). EPIC project is important for its results in terms of creating a Living Lab
based on the following aspects: user-driven open innovation, connected smart cities
and web-based services and the most important input for this proposal is the example
of creating living labs in the different urban environment and with different
technologies.
The concept is closely connected to the results of Open Cities Project (funded by the
European Union) especially to two of them: The Pan-European Platform (platforms for
Crowdsourcing, Open Data and Open Sensor Networks) and Future Internet Services &
Ideas (applications and ideas especially in the realm of mobile devices and Augmented
Reality applications). The mentioned projects were used as a source of information in
conjunction with the results of European project CITADEL (as a promoter of ‘Open
Data’ and User-Driven Innovation Systems in terms of developing ‘high speed’ Mobile
Applications that can be shared by citizens across Europe). The iCITY project intends
to develop and deploys an approach to allow third parties for creating, deploying,
operating and exploiting services based on the use of available public information,
digital assets and Opened Information Systems in cities (Jjumba & Dragićević, 2011;
Stevens, Dragicevic & Rothley, 2007).
Another category of information and results, very useful for deployment of this
concept in the paper, is coming from the European projects focused on mobility. Co-
Cities is a good example of this type of European research projects and it is a pilot
project to introduce and validate cooperative mobility services in cities and urban
areas. An important result is the development of a dynamic 'feedback loop' from
mobile users and travelers to the city's' traffic management centers and added
elements of cooperative mobility to traffic information services. CO-GISTICS is the first
European project fully dedicated to the deployment of cooperative intelligent
transport systems (C-ITS) applied to logistics and the results of the project could
support the mobility approach in terms of freight and logistics in an urban area
(Salanova Grau et al., 2016). The application of new ICT technologies, such as cloud
computing and Internet of Things are, in logistics could accelerate the development of
the smart city and smart mobility in an urban area (Nemtanu, Schlingensiepen &
Buretea, 2015). Project focused on Internet technologies could also support the
1032 Strategica 2016
deployment of the proposed project and good examples are MOBiNET - which is “the
Internet of (Transport and) Mobility” (it is an Internet-based network linking travelers,
transport users, transport system operators, service providers, content providers and
transport infrastructure) (Roth, Montavont & Noël, 2011; Mahadevan et al., 2006) –
and MOVEUS - the main goal of Moveus Project being to design, implement, pilot,
evaluate, disseminate and exploit a number of novel ICT tools for smart mobility in the
context of smart cities, directly addressing real users’ needs while promoting a habit-
change in their daily lives.
Another important aspect is to transfer the intelligence from the humans to the city
through different systems, an example could be the autonomic behavior of human
body transferred to the autonomic transport system (the example of ARTS)
(Schlingensiepen et al., 2014). The European cities and their trend in development are
analyzed in terms of defining the best model for a smart city at this time (after some
transformations of the city in a smart one, it need new models to be smarter and
smarter). Some initiatives, like Urban Audit, have already defined a set of key
performance indicators to measure the smartness of the city (Caragliu, Bo & Nijkamp,
2011).
The authors investigated in this paper one of the most important components of a
smart city, which is smart mobility. The extension of this investigation from one
component to all identified components of a smart city will be addressed in future
work and the recommendations will be proposed.
The concept
The new concept of the smart city is related directly to new technologies as well as
new approach in terms of sustainability. At the European level, a 6 components model
was proposed. This new model has to be adapted to the Romanian context, a set of
measures would be necessary to link a real Romanian city with a model, which is
derived from the European model of a smart city. All the components of the model
should be designed for different sizes of the city and the authors have proposed three
levels of city’s size: large, medium and small.
Smart
Mobility
Smart Smart
economy people
Smart
city
Smart living Smart
governance
Smart
environment
Figure 1. The main components (functional areas) of the smart city’s model (“European
Smart Cities,” n.d.)
Towards Sustainable Public Organizations 1033
Figure 1 presented as the model of a smart city is the upper part of a conceptual model
based on the functional decomposition of the system. Every component (out of 6) will
be decomposed into high-level functions and smart mobility will be the subject of this
operation in the paper. The pyramidal approach (the extension of the model) of this
conceptual model is presented in Figure 2.
Smart city
6 Main Components (Functional Areas)
High level functions (1...n)
Medium level functions (1...m)
Low level functions (1...p)
Figure 2. The extension of the conceptual model
Every main component is composed of (high level) functions and these functions could
be further decomposed into medium level functions and low-level functions (it
depends on the complexity of the high-level functions).
For the main component, the Smart Mobility, a list of high-level functions is the
following:
- Demand management (DM) - the main functionality is to collect real information
about the demand for mobility and transport in urban area;
- Public transport management (PT) - the management of public transport system;
- Traveler information and planning management (TIP) - the system should collect
information and should process all this information in terms of providing planning and
traveler information support;
- Traffic management (TM) - the management of all types of traffic in urban area
(vehicles, bicycles, pedestrians etc.);
- Autonomic cars and systems support (ACS) - support systems for autonomic cars as
well as the autonomic traffic management systems;
- Freight management (FM) - the management of freight transport and urban
logistics;
- Mobility as a Service (MaaS) - the mobility as a service is oriented to the mobility
needs of the citizens and should provide multimodal trip solutions;
- Law enforcement support (LE) - the enforcement of law and transport rules
(including pollution rules in urban area);
- Fee collection and financial support (FC) - the collection of fees and taxes as well as
the financial support for public transport and multimodal solutions;
- Parking and other modes support (POM) - the system should provide support for
parking management as well as for other transport modes;
1034 Strategica 2016
- Strategies and policies support (SP) - the system should collect and process
data/information for strategies and policies;
- Security (SEC) - the system should protect itself and other systems (export of
security).
The relations among all these high-level functions are presented in Figure 3 and the
approach is to define the dependencies between all functions in terms of revealing the
behavior of the smart mobility component.
After the definition of these dependencies, next step is to integrate the sub-model of
smart mobility in the smart city model and to create all links and relations among the
high-level functions of smart mobility and any other component of the smart city
model.
Smart Mobility
Strategies and
Policies
Law enforcement
Fee collection
and financial
support
Freight
Management
Autonomic cars Parking and other
and systems modes
Public Transport
Management
Traffic
Mobility as a Management
Service
Demand Traveller Info &
Management Planning
Figure 3. High level functions of Smart Mobility
These relations or dependencies among the high-level functions should define also the
logical data flows between functions. Every logical function has a set of data as inputs
Towards Sustainable Public Organizations 1035
and will generate a set of data as outputs. A function is able to collect data from various
functions or other entities and after the stage of processing data; the function will
generate data to other functions or entities (where entities could be other functions of
other components of smart city model or other systems). All collected data will be sent
using a data flow or logical data flow. This data flow could be decomposed into various
low-level data flows based on the same principle presented for functions.
Methodology
The main scope of this methodology is to pave the way for the implementation of this
new concept of smart cities in Sustainable Urban Mobility Plan (SUMP), as a strategic
tool, for Romanian cities. The objective is to find the gaps/differences between the real
city (and the associated model) and the ideal smart city (the target model). All gaps
will be filled using actions that are parts of the sustainable urban mobility plan.
Figure 4 is presenting the steps that are mandatory to follow in terms of providing a
real and connected model of the smart city and to adapt the model to the real context
of the city.
The selection of the European model focused on mobility (the authors have selected
the 6D model of the smart city as the main target model and the functional area/main
component of it is smart mobility) is the starting point of the process and the authors
decided to choose the European smart city model in terms of unifying the approach at
European level. The methodology could be applied to all reference models that are
selected by the user.
After the selection of the model, the next step is to define the main components of the
smart city as well as the high-level functions of each component. In fact, the main
component is a functional area, which is defined by a set of high-level functions, and
the definition of these high-level functions will define the main component itself.
The third step of the methodology is to consider this selected and defined model as a
reference or a target model and to develop a model of the city with existing and
implemented components and functions. The model of the real city is a dynamic model
and after the implementation of specific actions, this model will be changed.
The fourth step is to identify the differences between the target model and the model
of the real city. This comparative assessment will generate a list of requested functions
and the main challenge is to find the best actions to fulfill the requests in terms of
reaching the smart level of the city.
Another important issue is the adaptation of the model to Romanian context and the
construction of the model connected with the local factors (these factors will define the
environment of the city and they could be defined as STEEP factors - social,
technological, economic, environmental and political). The STEEP factors are directly
involved in defining the model as well as the result of the comparative assessment and
the actions of SUMP.
1036 Strategica 2016
The first version of the model or starting model will be refined and adapted to the local
context. The refining model will be used to find the gaps and the actions needed. The
actions are selected based on the expertise and best practices in the domain.
The authors recommend to use a software environment to create the model and one
solution is to use a LabVIEW and Matlab environment (this solution will open the door
for both mathematical model and hybrid model, with some real components as part of
the model).
Expertise, best The selection of the model
practice
The development of the smart city model
Target model - smart Real city model
city
Comparative assessment of the models
Actions to fill the gaps Identification of the gaps between
models
Sustainable Urban Mobility Plan
Smart City components
Figure 4. Methodology of using models in comparative assessment
Results
The research is based on comparative assessment between two models of the city: a
model for a smart city (target or reference model) and a model for the actual state of
the city (real model). At this stage a methodology is proposed and the first two steps
are have already done: the selection of the model (the selected model is the model
proposed by Smart Cities project with the details added by the authors) and the
development of the model (in this phase the authors have proposed a model for smart
mobility and the decomposition of this important component of a smart city into high,
medium and low-level functions.
Towards Sustainable Public Organizations 1037
After the validation of the methodology and the validation of the model for smart
mobility, based on the same approach, all components will be detailed in functions and
the reference model of the smart city will be ready for the comparative assessment.
Using the reference model or target model the next step is to elaborate a real model of
an existing city.
Based on these two models a comparative assessment will allow the researchers to
identify the main gaps between real model and the target model and to define some
actions to fill the gap and to transform the real model into the target model (this is the
main objective, to transform the city - real model - into a smart city - target model).
The comparative analysis of these two models (target and real) is identifying the gaps
and based on this analysis a set of the actions is needed to move the analysis in the
direction of filling the gaps and to achieve the final result, the smart city as a target
model.
All the defined actions will be integrated into the SUMP and the smart city concept will
be used in the definition of the strategic objective of the city.
Conclusions and recommendations
The modeling activity has the main scope the development of a representation of a real
thing or system using a specific language or a set of symbols/graphical elements. The
model could be simple or complex, the complexity of a model is able to generate a
more comprehensive representation of reality but it requires skilled developers to deal
with the model.
In this case, the modeling activity is based on a top-down approach and the simple
model is extended systematically with a number of iterations based on the requests
and the details needed in the comparative assessment. The model is a reduced
representation of the reality that is more proper to be analyzed and processed by
various specialists and systems and the main role is to create an instrument for an
understanding of the urban system as well as the components of the urban system.
The reference model (target model) is the ideal model and the actions of the SUMP
have to be defined in terms of moving the city in the direction of a smart city. On one
hand, if the target model is far to the real city model, the city need a huge number of
actions and this initiative could not be accepted by politicians (to invest more money
in a concept), on the other hand, if the target model is simplified, after the
implementation of the actions only a few elements of the smart city will be visible and
the actions will not be efficient. Another important issue is the structure of the smart
city, the components of the smart city. The complexity of the model is directly
connected with the number of components or functional areas.
The methodology proposed by the authors is designed for mobility and sustainable
urban mobility plans but it could be applied to all components of a smart city. The
main challenge is to export the methodology to all components and to create a
framework for modeling of smart cities in terms of identifying the gaps and the actions
to bridge the gaps.
1038 Strategica 2016
SUMP is a strategic tool for development of the transport system in the urban area in
terms of providing a high level of mobility in cities. The SUMP has to be elaborated
using the target model as the main objective for final result: the smart city. The paper
presented the methodology that will be applied by the authors on Romanian cities in
terms of providing sufficient data and inputs for smart city development in Romania.
The results of the paper are ready to be adapted to all components of a smart city as
well as to different types of cities (small, medium and large) and the model will be a
tool for the elaboration of different strategies at the local and regional levels. One
important output based on the results of this research will be the coherence and the
interdependency between different components of the city and the possibility to
demonstrate these in a single strategic document (at municipal and regional level).
The city managers are the main target audience of the results of this paper and the
model as well as the concepts presented in the paper will help city managers to do
strategic activities as well as planned actions in the direction of a smart city (as a target
of their activity as city managers). The concepts are strongly related to European
initiatives in terms of having a common European approach and to facilitate the access
to different European resources (requested for a smart city). The city managers will
use the methodology presented in the paper to adapt their actions during the process
of implementing the smart city components and to identify the opportunities as well as
the threats in doing this.
The next research steps are to create a functional model in laboratory based on the
methodology and the hypothesis of this paper and using two software environments:
LabVIEW and Matlab. Matlab software will facilitate the construction of the
mathematical model of a smart city, especially through the definition of the smart
function of the city, the inputs, and the outputs. The LabVIEW programming
environment will facilitate the integration of the mathematical model into a complex
multilayer model and the extension of the model with real components.
References
Caragliu, A., Bo, C.D., & Nijkamp, P. (2011). Smart Cities in Europe. Journal of Urban
Technology, 18(2), 65–82.
European Commission (2013). Together towards competitive and resource-efficient
urban mobility. COM.
European Smart Cities. (n.d.). Retrieved from http://www.smart-cities.eu/.
European Urban Agenda. (n.d.). Retrieved from
http://ec.europa.eu/regional_policy/sources/consultation/urb_agenda/pdf/sw
d_2015.pdf
Jjumba, A., & Dragićević, S. (2011). High-Resolution Urban Land-use Change Modeling:
Agent iCity Approach. Applied Spatial Analysis and Policy, 5(4), 291–315.
Mahadevan, P., Rodriguez, A., Becker, D., & Vahdat, A. (2006). MobiNet: a scalable
emulation infrastructure for ad-hoc and wireless networks. ACM SIGMOBILE
Mobile Computing and Communications Review, 10(2), 26–37.
Neirotti, P., De Marco, A., Cagliano, A. C., Mangano, G., & Scorrano, F. (2014). Current
trends in Smart City initiatives: Some stylised facts. Cities, 38(1), 25–36.
Towards Sustainable Public Organizations 1039
Nemtanu, F.C., Schlingensiepen, J., & Buretea, D. (2015). Cloudification of urban
logistics. Supply Chain Management Journal, 6(2). Retrieved from
https://drive.google.com/file/d/0B4dxx8_8gi7lWFRWU2czTlNuQ2M/view.
Roth, D., Montavont, J., & Noël, T. (2011). MOBINET: Mobility management across
different wireless sensor networks. In 2011 IEEE Wireless Communications and
Networking Conference (pp. 351–356). IEEE.
Salanova Grau, J.M., Rusich, A., Mitsakis, E., Ukovich, W., Fanti, M.P., Aifadopoulou, G., &
Papadopoulos, C. (2016). Evaluation framework in Cooperative Intelligent
Transport Systems (C-ITS) for freight transport: the case of the CO-GISTICS
speed advice service. International Journal of Advanced Logistics, 5(1), 30–43.
Schlingensiepen, J., Mehmood, R., Nemtanu, F.C., & Niculescu, M. (2014). Increasing
sustainability of road transport in European cities and metropolitan areas by
facilitating autonomic road transport systems (ARTS). In Sustainable Automotive
Technologies 2013 (pp.201–210). Heidelberg: Springer.
Stevens, D., Dragicevic, S., & Rothley, K. (2007). iCity: A GIS–CA modelling tool for
urban planning and decision making. Environmental Modelling & Software,
22(6), 761–773.
1040 Strategica 2016
TOWARDS SUSTAINABLE PUBLIC ORGANIZATIONS:
MEASURES FOR IMPROVEMENT
Victor Nwaoba ITUMO
Bucharest University of Economic Studies
6 Romana Square, 010374 Bucharest, Romania
victoritumo@yahoo.com
Abstract. The paper focuses on the concept of ‘towards sustainable public organizations’.
It will take a definitive holistic view of public organizations, role and functions of public
organizations, status or characteristics of the public organization and the brief schools of
thought or model of public organization; assess the challenges and proffer possible
suggestions towards their resolution. Public organizations are beginning to face more
operational challenges such as competition locally and internationally, competition
occasioned by digital commercial enterprises – online super business, security threats
including online threats by hackers, higher operational cost, technological innovations
and improvised alternatives. There is also the issue of impacts occasioned by
globalization, global terrorist activities, climate change effects, continuous increase in
the demography of the world, etc. Such challenges as above had made it extremely vital
for public organizations to take inventory of strategies for sustainability and efficiency,
just as combating these kinds of challenges task public organizations more not only in the
discharge of their roles and functions but in also keeping the establishment from external
threats. The research approach or methodology, making use of secondary data, would do
a holistic assessment of such concepts as public organizations, sustainable public
organizations, identify what the traditional and contemporary challenges of the public
organizations are, assess the impacts of the challenges of public organizations with a
view to drawing suggestions and recommendations towards their resolution from
experiences and practices that are widely applicable in various climes of the world. The
research would clearly look at the following; definitive holistic view of public
organizations, concepts as public organizations; what is sustainable public organization;
role and functions of public organizations; status of public organizations; brief school of
thought on public organizations; identify traditional challenges of public organizations;
identify contemporary challenges of public organizations; assess the challenges public
organizations; suggestions towards their resolution of challenges of Public organizations;
operational challenges such as competition locally and internationally; competition
occasioned by digital commercial enterprises such as online super business, security
threats including online threats by hackers, higher operational cost, technological
innovations and improvised alternatives.
Keywords: public; organizations; sustainable; bureaucratic; post-bureaucratic;
globalization; operation.
Towards Sustainable Public Organizations 1041
Introduction
It could be rightly adjudged that there are newer kinds of public organizations that
may be traced to the rise of newer kinds of societal challenges that have to be
addressed by the public sector. In addition, a growing dimension of the challenges of
public organizations is because of the rise in population, technological and digital
innovations taking place across the globe. The need for quality service delivery
continues to increase as local public institutions are further challenged by
contemporary global operators or cross-border operators. There is also threat aimed
at public organizations existing at the global level by known and unknown groups
some of which operate clandestinely or even in broad daylight. All these have much
more than before made it expedient for public organizations to innovate towards
improved performance of assigned roles and functions. This is more so as there is also
the need to favorably perform in a world that constantly perceives increasing
competitions; even the necessity of wading off effectively, threats at any level. This
article assesses some of these critical issues and proffers recommendations on
measures for improved performance towards sustainable public organizations.
What is a public organization?
“Public organizations serve the role of providing public services and creating and
implementing public policy. This role goes beyond the issues of efficiency and
effectiveness and includes values of equality, justice, and transparency” (Rodney &
Sherman, as cited in Raymond, 2009, p.79). They further referred to public
organizations as a “collective of individuals operating within a boundary that defines
insiders and outsiders” (Rodney & Sherman, as cited in Raymond, 2009, p.79). Sheasby
(2016, p.1) observes in an online article that, “A Public Organization is a state-run
organization. It is government controlled and is paid for by public taxation. Usually, a
general tax will pay for state provisions, but in some cases an alternative tax will.” He
further states “Public organizations take care of matters that the public informs the
government - via voting, protests, or debate - that they should be handling and
assisting with. The public demand a service and the Government, as elected
representatives and officials, have a duty to adhere to those wishes and orchestrate a
fair but effective service to help those who need it. Examples of public organizations
would be the Police and Fire Services” (Sheasby, 2016, p.1). On the other hand,
Shepherd (2013, p.4) notes, “public organizations (“bureaucracies”) are the state’s
agents for public collective action”. It further emphasizes that “Public organizations
deliver public services with more or less efficiency, equity, honesty, and
accountability” (Shepherd, 2013, p.4). In another consideration, the public
organization was defined as thus, “Public organizations carry out tasks on behalf of
society. In higher education, for example, this might entail preparing study reforms
through a government ministry and implementing new study programs through public
universities and colleges. Organizations can thus be understood as tools or
instruments for achieving certain goals seen as important in society, such as raising the
standard of higher education” (Christensen et al., 2007, p.20).
Summarily, a public organization can be defined as the state-owned institutions or
establishments with which public order and public services are provided for the
society. Public organizations represent the tool used by public administration or
1042 Strategica 2016
management to implement public policies and moderate the public life in various
segments of the society. Different kinds of public organizations exist for different
purposes of government. Examples include Ministry of transport for transport
systems, Ministry of health for the health sector, Ministry of Justice for legal,
prosecution and litigation issues, Ministry of Foreign Affairs for foreign relations,
Ministry of works for the work sector, Ministry of power for the power sector, Ministry
for petroleum resources for the energy sector, Ministry of Sports for issues relating to
sport, etc. Some public organizations also exist as Agencies or corporations established
for commercial purposes and profit maximization as applicable in some countries.
Examining the role and functions of public administration could help to provide a
better understanding of public organizations and what they are set to accomplish.
Role and functions of public organizations
As could be identified and deduced from various sources, some the roles and functions
of public organizations include the under-listed.
Provides public services – the public organizations work according to the regulations
or laws setting them up and ensures the provision of services to the society. However,
public organizations provide varying services which differ from each other.
Helps to formulate and create public policies – the public organizations also help to
formulate and create public policies with which the public administration exercises the
role of administration and management of the society. Public organizations do this
through a period of time-based on their existing knowledge and research which could
be attributed to the fact of their role as custodian of public properties, Libraries,
artifacts, historical documents and archives, cultural information, traditions, norms
and customs of the people over the years.
Helps to implement public policies – the formulation of public policies is quite different
from the implementation. In addition, the public organizations serve as channels
through which the public policies are implemented and carried out within the society.
Some public organizations have roles and functions that exceed national boundaries,
causing their scope of influence to be sub-regional, regional, or completely global.
Serves as the tool of public administration in the organization of the society – public
administration in every society do not go out there to discharge services directly to the
people. Instead, public organizations serve as the tool of the public administration for
rendering services and discharge of their responsibilities to the public.
Helps the public administration in realizing set objectives in effective governance – just
as in the case above, it is public organizations that help the public sector leadership to
realize the set objectives of government, especially in democratic societies where they
are allowed a great level of independence to carry out their functions. Democratic
governments of various countries have goals and set democratic dividends for delivery
to the people, public organizations are charged with these and directed to
expeditiously discharge it to the public. Such services could take various forms for
passage to the people, but in the final analysis, the public organizations –
Towards Sustainable Public Organizations 1043
establishments and institutions based on carved out roles, deliver these services and
functions to the public.
Helps in ensuring public order within the society – the various services provided by
the public administration through the instrumentality of the public organizations helps
to ensure public order and increase the confidence of the citizenry in the state
administration. The issue of public order is very important, just as could be seen in
societies where there is abysmal provision of public services, there is usually unease
on the part of the people which seldom results in change of public leadership through
periodic elections or the protest by the people against poor services by a particular
public organization or the local authorities.
Helps the public administration to evaluate extent of attainment of set targets and
objectives – after targets for achievement have been set by the political leadership or
public administration, it is still the public organizations which have been charged with
the implementation that is looked upon to provide the evaluation of the extent of
performance or realization of the set goals and targets.
What is a sustainable public organization?
The word ‘sustainable’ has been defined by Oxford Online Dictionary (2016) as
something that is “able to be maintained at a certain rate or level”. In essence,
sustainable is viewed as something that is able to be maintained consistently at a
certain level. The Merriam-Webster Dictionary (2016) variously defines sustainable as
“able to be used without being completely used up or destroyed”; “involving methods
that do not completely use up or destroy natural resources”; “able to last or continue
for a long time”; “capable to be sustained”. On the other hand, Cambridge Online
Dictionary (2016) defines sustainable as “able to continue over a period of time”;
“causing little or no damage to the environment and therefore able to continue for a
long time”.
Drawing inference from the definitions of sustainable above, it could then be averred
that sustainable public organization means a public institution or establishment that is
able to be maintained, sustained, causing little or no harm to the society and
environment of operation and is able to continue for a long time. Sustainable public
organizations could be seen as those publicly owned establishments which are able to
operate efficiently and effectively, playing significant roles, offering expected services
and exercising their relevance in such a way as to justify their existence, while
sufficiently supporting its operations and activities continuously for a long time.
Sustainable public organizations could additionally be referred as those public
establishments or institutions that are able to adopt relevant new skills, technological
innovations, results of advancement in studies, to reform and transform them to new
realities and confront newer challenges in a way that ensures continuous relevance
and meeting of set goals and obligations.
Public organizations cannot claim to be sustainable if they are not able to maintain
rendering of services and functions or doing so abysmally such that other competitors
are better at rendering or performance of the similar services as theirs. More so, public
organizations cannot be referred to as sustainable if they are unable to combat new
1044 Strategica 2016
kinds of a threat to the environment of operations. In addition, if an establishment is
unable to sustain and strengthen its existent for a long time, ensuring its relevance,
then it may not be referred to as relevant.
Brief schools of thought on public organizations and status of public
organizations
There have been references made by Kernaghan, Marson and Borins (2000) to two
forms of public organizations which are the traditional bureaucratic public
organization and the new Public organization also referred to as a post-bureaucratic
model of public organization. The example of the traditional model was cited which
was the award winning office of the registrar General in Ontario, Canada, that had
typical bureaucratic structure such as deep layers of management (6 layers from
director to front line), too specialized functionality (12 separate units), jobs were too
detailed and responsibilities over controlled (147 staff with 41 job descriptions that
had 23 different job classifications). Post-bureaucratic model of public organizations is
those that have adopted emergent reforms for better efficiency and effectiveness.
Irrespective of the categorization of public organizations or schools of thought held,
what is most crucial to point out is that public organizations must adopt new measures
and reforms to be able to be more effective and efficient. This position is more
pronounced given the emergent challenges facing the public organization in the 21st
century.
The status of public organizations which explains the conception, ownership,
management, functions, funding and other issues within which they are situated are
identified and explained below.
- Public organizations are publicly owned
- Public organizations are financed by the public fund.
- Public organizations are run by set public policies or standards as against private
organizations which may be run by idiosyncratic opinions.
- Public organizations are set up by public administration through public policy or
legislative framework.
- Public organizations have a higher level of stability and continuity so long as laws
setting them up are not abrogated.
- Public organizations are set up because of overriding public interest and therefore
may not be held liable for minor infringements or inconveniences to few individuals in
the society.
- Public organizations operate within the confines of the laws that set them up.
- Public organizations as a legal entity may be sued at the law court, especially in a
democratic society.
Christensen et al. (2007) also indicated some characteristics of public organizations.
They include, public organizations have leadership elected by popular votes. This is to
say that public organizations are led by political leadership at the helm of affairs at the
state level to which the public organization management accounts to. They noted
specifically that such political leadership is democratically elected. Next according to
them is that public organizations are multifunctional, implying that some of the
publicly owned establishments are charged with multiple task or responsibilities
Towards Sustainable Public Organizations 1045
sometimes to discharge for the society. Thirdly, they further observed that public
organizations do not operate within a free and competitive market.
Traditional challenges of public organizations
Too much bureaucracy, bureaucratic delays or red-tape-ism.: public organizations
were traditionally known to be too bureaucratic, sluggish and too slow in discharging
functions. This was because of the numerous numbers of people often required to
convey approval for actions to be discharged. This sharply contrast with decision
making or process of getting approval in private organizations where Chief Executive
Officer (CEO), General Managing Director (GMD) or the business or organization owner
could unilaterally and suddenly make and effect a decision. The situation of
bureaucracy in public organization sometimes happens in a way that could be
described as most unfortunate in some climes where public services processed has not
been well developed or formalized or given the attention it requires. There are some
cases of services broken down for weeks or even months without being fixed. There
are cases of absence of relevant staff and it affects many other progressive processes of
operations for a very long time.
Slow decision-making process – much like the case of bureaucratic delays, slow
decision process used to be one of those known characteristics of public organizations
and is subsumed in the existence of too much bureaucracy as explained above. The
slow decision-making process affects effective and efficient performance in public
organizations.
A Larger number of people handling lesser units of responsibilities – there used to be
more people handling lesser or fewer units of responsibilities. For example, a case of
ten persons handling the work of six persons. This too reduces efficiency in the
productivity of the public organization as well creates awkwardness in the lines of
reporting. The public organizations spend more also in compensation of more workers
who do the work that fewer people could have done.
The lesser act of holding anyone responsible for shortfalls, it is blamed on the system
rather than on individuals – the workers in public organizations were often seen as
carrying out their roles and functions on behalf of the organizations, so it made it hard
for most workers to be held liable for event things went wrong. This scenario had the
potential of eliciting reckless behavior from a worker knowing fully well that he may
not be directly held liable for his actions and inactions.
Issues of liability or litigation rest on the organization rather than on individuals –
public organizations management are often sued in cases of litigation against the
organization instead of individuals. This occurs even when the issue at stake is caused
by an individual worker. This could promote acts of carelessness on the part of some
workers since liability may lie with the public organization and not them.
The traditional challenges of the public organizations discussed above accounts for
what used to be the case in public organizations’ operations. There had been
improvements in the configuration and operations of public organizations especially
with the emphasis on the post-bureaucratic model of public organizations.
1046 Strategica 2016
Emerging challenges of public organizations
Improved and modern communication needs – public organizations now have the need
for improved and modern communication gadgets. This is especially because of the
advancements in the information communication technology (ICT) industry some of
which make passage of information easier and cost effective.
Improvised alternatives and/or better services providers at the global market and new
forms of competitions – online super businesses, digital commercial enterprises- there
are super businesses or what could also be referred to as supranational organizations
which operate across borders or beyond national boundaries with a presence in many
countries. They have the capacity to disrupt or seek to take over some kinds of services
rendered by some public organizations if allowed by foreign governments.
Security threats including those from online hackers – there are obvious security
threats from terrorist activities and now includes more than before the disruptive
activities of cyber security threats or online hackers attacking governments or seeking
to dismantle or take over public organizations’ operations and websites from the
farthest of distances which is closest due to advancements in global online
technologies.
- The need for technological innovations and know-how - Public organizations now
have a need to advance in technology and expertise in order to be in tune with the with
the modern times where globalization in various concepts is pushing out so much
placing additional demands on organizations.
- The higher cost of operation - because of increase in operations arising from an
increase in population requiring various services offered by public organizations, there
now exists higher cost of operations.
- Increase in population and demand for services
- Multitasking roles – public organizations also currently have multitasking roles to
play as seldom assigned by legislation or the political leadership.
Kernaghan et al. (2000) identified some forces driving public service reform which can
also be seen as the newer kinds of challenges facing the public organizations. They
identified External forces and domestic forces as the kinds of driving forces. Some of
the external forces or challenges include globalization, technological revolution. Some
of the domestic forces or challenges include financial constraints, public demand for
quality services, the changing political culture, demographic change, the legacy of
earlier reforms. It can be underscored following the above explanation that on the
external factor, globalization and technological innovations affects public
organizations. By globalization, it implies there are international issues affecting local
public organizational performance and services. Under this factor of globalization, it
can also be averred that, presently, there is greater integration and cooperation along
economic blocs, geographical propinquity, military needs and defense, health, etc.
global cooperation along these lines often affects the nature of performance or services
of even a localized public organization of various countries. A good example in this
regard would be the copyright commissions’ agencies or organizations in various
countries which considers as registered any registration already done in another
country which is a member or signatory of the Berne Convention on intellectual
property rights. Further, on the technological revolution on external factors, there are
now technological discoveries and incursions that challenge the status-quo of
Towards Sustainable Public Organizations 1047
performance and services rendered by public organizations and therefore place them
under pressure for reform and advancement or upgrade of systems and platforms of
operations. On the domestic forces, financial constraints is a great challenge to public
organizations as countries are only able to fund them based on the availability of funds
at the state level as often presented in the annual budget estimates. The drawing of
funds by the public organization from consolidated funds of a country are usually
minimal, most still have to depend on budgetary provision for funding. When the
budget is low or is delayed in passage and release of funds, the services, and activities
of public organizations are affected negatively. Further, in the domestic forces driving
public organizations, the public demand for better services has become a recurrent
feature in the society towards the public organization. Given advancements in
technological communication systems and the impact of globalization where there is
also the existence of cross-border trades, the public of most enlightened societies are
aware of services provided by other public organizations in other climes and therefore
expect something more if possible or on the minimum requirement, services
comparable to another quality one across the border. This challenge is even profound
given the fact that people can now buy from or do business with other countries’ public
organizations providing some kinds of specialized services without necessarily leaving
the confines of their house in another country. This leaves localized public
organizations with no choice of lowly operations, but the pressure for better
performance and services. Also in the domestic aspect is the changing political culture.
In countries where there is no adequately entrenched political and public
administration culture of continuity of programs and projects which are of interest to
the people, the focus and proposals earlier been pursued by public organizations may
be upturned or derailed by political leadership or new parties that clinch the positions
of leadership for the first time. Furthermore, regarding the change in political culture,
it used to be in countries where military coups take place that some public
organizations have their roles abrogated by unilateral military decrees or their
existence disintegrated. In the domestic aspect is also the demographic change. The
world population is increasing at a quick succession. This potentially means that there
is more to be done in virtually all areas of human needs. These human needs is catered
for or provided by various countries’ public organizations, besides what is done by the
international organizations like the United Nations, world health organization,
international monetary funds, Commonwealth of Nations, World Food Program,
UNESCO, etc. Also inclusive in the points mentioned under the domestic factors is the
legacy of earlier reforms. When public organizations have made a mark of great
success and achievement in the past, it only becomes reasonable and wise for them to
improve on past legacies and results, meaning they have to continue to improve on
their performance and services to exceed previous levels and standards. In essence
earlier reforms well positions public organizations for stronger and better
performance as the people would not even expect anything less, especially when the
right reforms and enabling laws and regulations are in place.
Goodkind (2016) observes of the five biggest threats to businesses right now as was
articulated by a retired four-star general and former USA 2004 Democratic
presidential candidate Wesley Clark to include, terrorism, cyber security threats,
financial system stability, the emergence of China as a superpower with global
ambitions and climate change. Goodkind (2016) further reports of Clark’s statement as
noting that terrorism is a problem that leaks its way into all facets of life, even the
economy. He explained that the terrorist attacks on September. 11, 2001, in United
1048 Strategica 2016
States of America cost an estimated $3.3 trillion, based on the research of The New
York Times. He further explained that the other issue of cyber security crimes is the
greatest threat facing every business in the world today and often go undetected due to
lack of funding which could help to identify and combat the business menace. The
other issues of financial system stability, the emergence of China as a superpower with
global ambitions and climate change all affect businesses one way or the other. These
kinds of problems associated with doing businesses currently at the global level are
not only linked to private enterprises, they also form part of the challenges faced by
public organizations across the world. Considering the traditional and contemporary
or emergent challenges of the public organizations as highlighted in this work, the
question now remains what is the way forward for public organizations’ progress?
What are the means and strategies towards sustainable public organizations? This
makes it necessary to adopt a number of measures or strategies which is why this
work had come up with suggestions and possible solutions christened below as
recommendations.
Conclusions and implications/ discussions on the challenges facing public
organization
All the difficulty scenarios that the public organizations find themselves present both
challenges and opportunities. Even though some of the challenges facing public
organizations are newer kinds thereof, but they still present an opportunity for
improvement and increase in efficiency and service delivery. This would be applicable
and obtainable for all public organizations that could adopt workable solutions and
recommendations proffered in scholarly contributions. The fact remains that the
public organizations’ problems are already existent and therefore, the only path
available in going forward is to seek ways of tackling and resolving them. If public
organizations fail to reform and take relevant measures to combat the challenges,
whether traditional or emerging ones, they would, without a doubt, hamper their
performance and may clearly be exposed to global real threats that are too dangerous
for operations of any organization.
Recommendations
A number of recommendations have been advanced in this article as the way forward
towards sustainable public organizations at the global level. The recommendations are
being made bearing in mind that the environment of operations of the public
organizations are much different today than it used to be many years ago. There is no
doubt that public organizations need to do more for better performance, services and
functions for the political leadership and most importantly to the people, which is
because of the array of both traditional and especially the contemporary or emergent
challenges faced by them. In the light of the foregoing, the recommendations for
enhanced performance of sustainable public organizations include:
- Public organizations should focus on increased research in order to find out how to
improve on services and performance, even while delivering on functions and services
already in existence.
Towards Sustainable Public Organizations 1049
- Public organizations should seek to increase capacity and potential for enormous
services delivery because of the continuous demographic increase in all localities
across the globe.
- Public organizations should improve their technological expertise and innovate as a
means of being in touch with modern tech tools and operations and in order to be able
to resist and block the marauding invasion of online security threats.
- Public organizations should also be economically prudent, as doing so is vital given
the economic challenges faced by various countries in the 21st century, even if there is
an increase in the cost of operations due to increased services.
- Public organizations should also train their staff periodically as doing so would
increase their knowledge base and improve their performance.
- Public organizations must handle the issue of multitasking roles professionally by
engaging the requisite employees for the various segments of their operations, instead
of using available staff to do all operations which could derail focus and cause
mistakes.
- Public organizations must continue to ensure efficient services delivery while
maintaining an effective managerial procedure that ensures no online super business
or digital enterprise could duplicate their roles or limit interest in their functions or
even as an alternative to their set out goals and objectives.
References
Cambridge University Press (2016). Cambridge online dictionary 2016. Retrieved from
http://dictionary.c ambridge.org/dictionaryenglish/sustainable.
Christensen, T., Lægreid, P., Roness P.G., & Røvik K.A. (2007). Organization theory and
the Public Sector. Retrieved from http://www.europe-
solidarity.eu/documents/ES_ORGAN IZAT_THEOR Y_2007.pdf.
Goodkind, N. (2016). Five biggest threats to business right now. Retrieved from
http://finance.yahoo.com/news/the-five-biggest-threats-to-business-right-
now-182109602.html.
Kernaghan, K., Marson, B., & Borins, S. (2000). The New Public Organisation. Retrieved
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behaviour. In W.C. Raymond III (Ed.), Ethics and Integrity in Public
Administration: Concepts & Cases (pp.77-89). New York: Prentice Hall.
Shepherd, G. (2013). Public organizations: what makes them work? How are they
changing? How can the Bank support reform? Retrieved from
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organizations-what-makes-them-work-how-are-they-changing-how-can-the-
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Sheasby, L. (2016). What is the definition of public organization. Retrieved from
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organization.
1050 Strategica 2016
THE ROLE OF GREEN PUBLIC PROCUREMENT AT THE EU LEVEL IN
SUSTAINABLE PUBLIC ADMINISTRATION THROUGH CSR
Irene LITARDI
Tor Vergata University
2 Via Columbia, 00133 Rome, Italy
litardi@economia.uniroma2.it
Gloria FIORANI
Tor Vergata University
2 Via Columbia, 00133 Rome, Italy
fiorani@economia.uniroma2.it
Abstract. This study aims to highlight the goodness of GPP practices in response to
environmental and economic problems, with special reference to experiences in European
countries. After a systematic review of the documental sources and regulations, the paper
presents the results of a multidimensional analysis conducted on a cluster of 108 GPP
practices, identified in the European Union and implemented by governments in 27
countries at central, regional and local levels. Among the analyzed variables includes the
geographical origin of the cases, concerned administrative level, implementation period,
GPP criteria of implementation, environmental and economic impact. The article,
therefore, has the objective to reconstruct the state of the art of green public
procurement at the European level through a comparative analysis.
Keywords: Green procurement; sustainability; CSR; sustainable public organizations;
public administration.
Introduction: research background and method
The lack of sustainable orientation of the current consumption model, based on
increasing demand for resources, requires a change of direction, so that in the long-
term the economic growth is not subject to failure and do not compromise the integrity
of the environment and public health. In this scenario, the role of public spending
becomes important, that is able to direct the purchases and the market towards
greater sustainability.
The GPP development in Europe since the early 90’s, was driven by the key role played
by Rio de Janeiro meeting (UNCED, 1992), which marks the birth of a compendium of
directions to be followed in the twenty-first century by each State, namely Agenda 21.
The latter implies, in particular, the need to review the purchasing policies of agencies
and departments in order to improve, if possible, the environmental implications of
public procurement (UNCED, 1992). The structure of the Agenda is divided into four
parts: social and economic dimensions, conservation and resource management for
development, strengthening the role of the most significant groups and
implementation instruments. Likewise, the concept of sustainable development,
defined in 1987, is based on four key dimensions such as economic, social,
environmental and institutional sustainability, and, such as Agenda 21, has some
Towards Sustainable Public Organizations 1051
convergent points with the Triple Bottom Line (3BL) approach, introduced by
Elkington in 1995.
The author revises the concept of Corporate Social Performance (CSP) introduced by
Carroll in 1979, which defines the achievement of the social goals of the businesses as
the effect resulting from the combination of four different dimensions: economic, legal,
ethical and philanthropic. Specifically, Elkington (1997) focuses his attention on the
first three dimensions, placing at the core choices of Corporate Social Responsibility
(CSR), the economic, social and, ultimately, the environment areas, as the key to
success in the long run. Ongoing research by the public authorities of useful solutions
to curb their impacts on the ecosystem, along with increasing public opinion attention
to the environment, have forced governments to pay attention, increase efforts and
deliver resources towards sustainable development. This led to considering Green
Public Procurement (GPP) as an instrument able of binding the environmental
dimension to public spending, as well of changing the former consumption patterns
among countries (Table 1).
Tabel 1. Main benefits and barriers to GPP application
BENEFITS BARRIERS
REGULATORY The inclusion of waste disposal Too much elasticity of the
PRESSURE costs in the financial statements; legislation on the adoption of
energy consumption and standards, uncertainty of certain
environmental report. rules; voluntary adoption of green
standards and regulatory.
ECONOMIC Reduction of energy consumption GPP’s investments could limit the
ASPECT costs; improving management financial resources making it
efficiency and process; the impossible to spending some
possibility of revenues from new primary investment; negatively
partnerships; reduce the price for affecting the profitability in short
environmental technologies; period; high prices of
promote green job profile. environmentally friendly products;
high prices for the technologies.
SUSTAINABLE The incentive to develop new The development and
INNOVATION supply chain processes in line implementation of these practices
with the environmental and social may take the time to CEO and
aspects (innovation at managers who could lose the
management level and / or primary objectives.
production and / or knowledge).
SOCIAL AND Decrease of environmental Some investments in favor of the
ENVIRONMENTAL impact, consumer loyalty, stakeholders can increase the
ASPECT enhancement of reputation to the operating costs without the
civil society, enhancement of expected return; lack of specific
relationship and partnerships expertise; lack of information.
with private and nonprofit
organizations; use of alternative
energy sources;
The research aims to sketch out the state-of-art of the Green Public Procurement (GPP)
practices in the European Union countries. The documental analysis on the last two
decades regulatory measures and policy, initiated by the European Commission, aims
to provide a summary of the major themes in the field of green public procurement,
underlying the growing attention to the instrument by the Commission and its
evolution towards Sustainable Public Procurement (SPP), along with the inclusion of
1052 Strategica 2016
social and environmental requirements, within the tendering procedures (focus of the
Directives from the beginning 2014).
The empirical research part is based on an exploration of a multi- dimensional cluster
of 108 GPP practices (updated in November 2015), identified by the European
Commission starting with 2010 and implemented by the 27 Member States public
administrations at local, regional and national levels. In particular, a systematic
analysis was carried out on the published cards by the European Commission.
Each card is structured on six dimensions, and underline:
- the objective of procurement, i.e. the reasons behind the public administration
objectives to do a tender and the aims to be pursued;
- the background, a summary of the already activated GPP activities by the concerned
public administrations;
- the criterion used, the information on the environmental criteria adopted (falling into
one or more categories available at Community level), as well as additional
information about the tender;
- the results, i.e. the description of the procedure outcome;
- the environmental impact, resulting from the end actions undertaken;
- the lessons learned, gathering key points on which to set future strategies and
identified mistakes to avoid in the future purchasing procedures.
The information contained in the sections of the cards have been systematized,
summarized and elaborated in order to present a mapping of public administrations
initiatives and their critical reading on the basis of the main theories and models
analyzed (NPM, PG, 3BL). According to the theory of 3BL, the variables analyzed
include in addition to the geographical origin of the cases, the implementation period
and level of government concerned, as well as the criterion used and the economic and
environmental factors that are closely linked with the dimensions defining this theory.
In particular, each variable has been operationalised into indicators, such as the
starting year of the procurement contract; the country of reference; the complexity of
the administrative structure, divided by local, regional/provincial and national; the
tender sector (each containing the criteria to be used); the award criterion (most
economically advantageous offer; lowest price or other methods); the presence or lack
of economic and environmental impacts - positive, negative or none - both in
quantitative and qualitative terms.
Through the case studies analyzed it was possible to identify the overlap between the
regulatory processes of the European Commission and the Public Administrations
initiatives, the most active geographical areas, the main government level involved and
finally, the most used environmental criteria and award criterion.
Case study analysis: Green Public Procurement Initiative at the EU level
European Commission, through the Green Paper of 2001 recognized the increased
importance of corporate social responsibility. CSR policy is defined by the business
ability to integrate with activities, the environmental and social awareness, albeit
voluntarily. Public sector sought a multi-stakeholder approach to the process of
innovation and modernization of the public administration, aimed at the whole
Towards Sustainable Public Organizations 1053
community, understood as a society, since the 90s. During this period the attempts
were first to overcome the traditional public administration through the transfer of
operating modes from the private sector to the public sector, in order to improve the
government management (OECD & PUMA, 1996). The difficulty of adapting to these
logics has led over time to a passage from the NPM paradigm to that of Public
Governance, which through a stronger cooperation between the public, private and
civil society, focuses on the need for environment protection, the development of new
technologies, the culture of individuality and internationalization of issues such as
migration and development cooperation. Among the useful policy instruments to
address the first requirement is the GPP, which has had a remarkable development,
both at legal and theoretical level (Becchetti, Bruni & Zamagni, 2010; Bertoldi, Bornás,
Monni & de Raveschoot, 2010; Bettini, Masini & Ricotta, 2006; Saltari & Travaglini,
2005; Szuppinger, 2005), to become a pillar on which it can support the environmental
strategies at European level (Tukker et al., 2008).
Reviewing the main regulations stages on the theme of green procurement, 1996
definitely marks a turning point, along with European Commission’s Green Paper on
public procurement, which introduced the environmental and social requirements at
the level of national and communitarian competitions. Back in 2001, the Sixth
Environment Action Programme of the European Community (European Commission,
2001), defines the Integrated Product Policy (IPP) as a new paradigm of growth which
is able to create wealth and competitiveness on the basis of eco-environmental friendly
products.
Furthermore, it is suggested a strategy for fostering the production policies, requiring
less use of resources, therefore, inducing a reduced environmental impact, ecological
risks as well as greater attention to the production of waste, starting from the design
phase. All these aspects contribute to the life cycle approach to the product, which
along with the stakeholder’s engagement, plays a key role in fulfilling the objectives.
The bottom-up engagement model of this policy converges fully with the last decade
slogan initiated by the Agenda 21 - “think globally, act locally”. Later, with the National
Action Plan on GPP, the IPP instrument is inextricably linked to the theme of green
public procurement, stipulating within the tenders the integration of environmental
criteria, thus ensuring increased widespread among the Member States (European
Commission, 2003).
The European Commission (2014) reveals that twenty-two countries have included in
their strategies and publicized their national plan of action, also sometimes in a
renewed version, while, the other six do not possess any documents amenable to this
plan (Table 2). In the same period, due to the considerable complexity reached by the
EU administrative law, there are challenges to providing new solutions into the public
procurement strategies, referring to regulatory provisions in the support of the
environment. In a first stage, the Communication 274 of 2001, with which the
Commission renew previous publications, describes the entire procurement process,
identifying the contracts included in the directives and highlighting the possibilities
offered by existing rules to structure the various stages of a procurement tender,
starting with the definition of its subject to the execution and completion of the same.
1054 Strategica 2016
Tabel 2. Status of implementation of PAN GPP in EU28
Countries
PAN or Austria, Belgium, Bulgaria, Cyprus, Denmark, Finland, France,
equivalent Germany, Ireland, Italy, Latvia, Lithuania, Malta, Netherlands, Poland,
document Portugal, United Kingdom, Czech Republic, Slovakia, Slovenia, Spain,
Sweden
No PAN exists Croatia, Estonia, Greece, Luxembourg, Romania, Hungary
Later, the Directives 17 and 18 of 2004 support further certain decisions of the
European Court of Justice, filling some gaps in legislation and providing the legal
support on GPP. Both Directives, guiding the Member States currently, respectively
govern the procedures of “Public procurement in water, energy, transport and postal
services” and “Public procurement in work, supply, and services”. In support of the
Member States efforts, the European Commission enacted the Communication 400
(2008) “Public procurement for a better environment”, which accompanies the action
plan “Sustainable Consumption and Production” and “Sustainable Industrial Policy” of
the same year (European Commission, 2008).
According to the first directive, the Green Public Procurement is defined as “the
approach by which Public Administrations integrate environmental criteria into all
stages of the acquisition process, encouraging the spread of environmental
technologies and development of environmentally sound products, through research
and choosing outcomes and solutions that have the least impact on the environment
throughout the life cycle”. The definition, widely accepted by the literature, recognized
the GPP as a tool able to guiding the market for products and services and allowing the
Public Administrations to carry out their purchases with less impact on the
environment, through the adoption of minimum environmental criteria. The second
directive is concerned with the implementation of several measures aimed to improve
the energy and environmental performance of the products throughout their life cycle
and to stimulate the demand and the consumption of better quality products, creating
a “virtuous circle”.
In the midst of financial and economic crisis, the European Union redefines its long-
term objectives with a prospective to achieving sustainability. The objective is to “turn
the crisis into an opportunity to promote the financial and ecological sustainability
while developing likewise, a dynamic society with low-carbon economy, that makes
efficient use of resources, both knowledge-based and socially inclusive, and to support
this approach at the global level” (European Commission, 2009).
Towards Sustainable Public Organizations 1055
1992 2009
» Agenda 21 » COM(2009) 400
1996 Sixth Environment Action 2010
Programme of the Europe 2020 (inclusive,
» COM(96) 583 European » COM(2010) 2020 smart and sustainable);
2001 Community(COM(2001) 2011 European Map 2050
31), defines the Integrated
» COM(2001) 31 Product Policy (IPP) » COM(2011) 896
» COM(2001) 274 » COM(2011) 855
2003 National Action Plan on 2014
Simplify the structure of
» COM(2003) 302 GPP and Integration of » Directive 2014/23/UE the purchase contract and
enviromental criteria on
2004 » Directive 2014/24/UE include requirement
procurement procedures
fostering social and
» Directive 2004/17/EC » Directive 2014/25/UE eviromental responsibility
» Directive 2004/18/EC
2008 “Public Procurement for the
Sustainable Public
better environment”;
» COM(2008) 397 Procurement
“Sustainable consumption and
» COM(2008) 400 production” and “Sustainable
Industrial Policy”
Figure 1. Relevats Regulations on Green Public Procurement
In March 2010, European Commission launched the Europe 2020 Strategy, which, in
line with the provisions of the Kyoto Protocol, providing three approaches of growth
(inclusive, smart and sustainable) to be implemented in the Member States, reaffirms
the importance of public procurement as an element to “foster the transition to
efficient economy in terms of resources and low-carbon emissions” (European
Commission, 2010). The Strategy is inserted, in turn, into a larger project of long-run in
which the European Union is involved, the “European Roadmap”, which requires the
transition to a low carbon economy by 2050: -25 % in 2020, - 40% in 2030, -60% in
2040 and -80% in 2050.
In reaching targeted objectives, there is a need for a paradigm shift in the public
authorities culture, that, enforcing the support to the future strategies and the
European Union norms (European Commission, 2011), will be able to substitute, at the
criteria of policy assignment of the “lowest price” to that of the “lowest cost”, taking
into account the life cycle of the procurement (European Commission, 2014). The life
cycle of the environment, make reference to the concept of Life Cycle Assessment
(LCA), linked also to the Life Cycle Costing (LCC), which is the core of the Green Public
Procurement (European Commission, 2003). A Life Cycle Assessment is defined by the
European Commission, as a method of assessment of the product, process or activity
impact on the environment throughout the life cycle. The public procurement norms
identify a set of contracts, including those containing environmental considerations,
seen as “particularly complex”, providing two alternative methods of assessment:
lowest price and most cost-effective offer. In the second stage, defined by the situation
in which the client undertakes a competitive dialogue phase, can be used for the costs
calculation the criteria of Life Cycle Costing, a tool that allows considering the entire
life cycle of the works, services or supplies covered by the procurement and not just
their price. The traditionally used method by businesses and governments to calculate
the life cycle cost is based on a purely financial analysis with four dimensions: the cost
of investment, management, services and final disposal. The LCC method proposed
within the environmental strategies, adds a fifth dimension, such as the external
environmental costs, calculated by assigning a monetary value to the externalities
detected by the analysis of the life cycle of the product (European Commission, 2014).
1056 Strategica 2016
A diversified framework of practices is observed through the multidimensional
analysis of the 108 GPP practices identified by the European Union. Specifically,
concerning the research first dimension, namely the geographic origin, it is possible to
observe that, although 42 cases of the total sample are from the Green-7: Austria (4),
Denmark (4), Finland (6), Germany (8), Netherlands (5), Sweden (6), UK (9) (Table 3).
The second dimension analyzed was the levels of government mostly engaged in
activities of GPP. Such indicator underlines the predominant engagement of the local
government (58%) (Municipalities, universities, schools, museums and other
organizations or local authorities), which, often supported by political level, are
engaged in environmental causes since early 2000s: Barcelona (Spain), Budapest
(Hungary) and Dunkerque (France) or, more rarely, from the 90s, as in the case of the
city of Esbjerg, Kolding (Denmark) and Stockholm (Sweden) and Vienna (Austria).
Table 3. Geographic origin of the cases analyzed
Countries Numbers of cases for each Country
Spain 14
Italy, UK 9
Germany, France 8
Sweden, Finland 6
Netherlands, Irland 5
Denmark, Austria 4
Malta, Slovenia, Portugal, Belgium, Norway 3
Estonia, Switzerland, Bulgaria, Hungary 2
Luxembourg, Cyprus, Lithuania, Iceland, 1
Romania, Greece, Latvia
Total 108
The 23% of best practices comes from the regional/provincial level; several cases
highlights the engagement of regional commissions of Spain, Belgium and Italian, such
as the Department of the Environment and Territorial Policy of the Basque
Government (IHOBE), the Regional Agency for Environmental Protection of Tuscany
(ARPAT), the Lombardy Central Regional Agency of Purchases and Valle Aosta Region
(the last active on environmental issues since the mid-2000s) and some County
Councils in the United Kingdom (Gloucestershire, Cornwall and East Ayrshire). The last
19% is represented by the national public administration, such as ministries (Hungary,
Latvia and France) and commissions (Italy, Ireland, Lithuania, and Germany),
introducing environmental criteria with the aim to encourage its application to lower
government levels and facilitate their introduction within the procurement tenders
(Figure 2).
Figure 2. Administrative level of the case studies
Towards Sustainable Public Organizations 1057
In terms of reference year of implementation, all cases covers the period 1999-2014
(Figure 2), with a peak in 2009 and 2010 (36%) (Figure 3), which coincides with the
EU enactment period of most significant regulatory actions and policy in terms of GPP,
including: COM(2008) 397 “Sustainable consumption and production” and
“Sustainable industrial policy”, COM(2008) 400 “Public procurement for a better
environment”, COM(2009) 400 “Mainstreaming the sustainable development into EU
policies: 2009 Review of the EU Strategy for Sustainable Development”, COM(2010)
2020 “A strategy for smart, sustainable and inclusive growth”.
Figure 3. Number of cases ranked by reference year
Among the 108 cases of procurement the key priority sectors identified are:
Construction, Copying and graphic paper and Transport as per, respectively, 23, 14 and
15 cases; followed by Electricity and Cleaning products and services (10 cases), Office
equipment (9 cases), Furniture (7 cases), Food and Catering services (10 and 12 cases),
Street lighting and traffic signals (4 cases), Gardening products and services (5 cases),
Wall panels, Textiles and Imaging equipment (3 cases), Water management and
Cogeneration (2 cases), Hard floor coverings and Roads construction and traffic signs
(1 case); while, remaining sectors are not mentioned in any case practice examined.
The European Commission emphasizes the need to distinguish between two
categories: “core” and “comprehensive” criteria. The first criteria are designed to allow
easy application of GPP, focusing on the specific area of the product environmental
performance and aimed at keeping the administrative and economic costs; while the
second criteria take into account more aspects or higher levels of environmental
performance, with consequent higher costs. In fact, the first should be based on the
European Eco-label criteria, which address the main environmental impacts and are
easier to fulfill, while the second resume additional criteria of the Eco- label that can be
considered important for the definition of a specific product. Considering that 25 out of
108 cases analyzed are multi-sector procurement GPP, of which 10 include the
“product scheme” which have not been reported by the EU Commission as a sector, in
the research has been considered as such because of its recurring presence. In a
similar vein is the particular case of the construction, office equipment, and furniture
sectors.
Such assumption raises the complexity of the above-mentioned sectors and therefore
the support of a “product scheme” specification, as the Commission itself points out in
the Directive COM(2008) 400, along with the “ten priority sectors” for GPP, that have
been selected on the basis of the importance of the relevant sector in terms of the
1058 Strategica 2016
scope for environmental improvement; public expenditure; potential impact on the
supply side; example setting for private or corporate consumers; political sensitivity;
existence of relevant and easy-to-use criteria; market availability and economic
efficiency, such as: Construction (covering raw materials, such as wood, aluminium,
steel, glass, as well as construction products, such as windows, wall and floor
coverings, heating and cooling equipment, operational and end-of-life aspects of
buildings, maintenance services, on site performance of works contracts), Food and
catering services, Transport and transport services, Energy (including electricity,
heating and cooling coming from renewable energy sources), Office machinery and
computers, Clothing, uniforms and other textiles, Paper and printing services,
Furniture, Cleaning products and services, Equipment used in the health sector
(European Commission, 2008). Not having found a high repeatability between the
multi-sector associations is not possible to affirm a particular behavior in the last
years, by the public authorities, during the tenders.
By and large, within the enlisted case samples analyzed, it is possible to identify many
features that characterize Green Public Procurement. Firstly, there is the use of criteria
and eco-brands, based on the Life Cost Assessment (Figure 4) that assures the
inclusion of environmental aspects in the tendering products throughout the entire
lifecycle, from the extraction to the end life of the product. Secondly, in respect of the
competition, in the application of public procurement directives, the PA is given free
options to promote environmental protection, through the introduction of specific
technics in the procurement tender documents.
Figure 4. Life Cost Assessment Process
It constitutes a barrier to participation in the tendering competition but also an
innovative stimulus to competitors; examples are the minimum environmental criteria
and the eco-brands, particularly present in the 108 cases. To it is added the
consideration of Life Cycle Costing, applied in some of the case projects examined, with
the aim to achieve cost reduction and the assessment phase of the offers prices
received. Within the schemes, yield information is also referring to the criterion award
used during the tender. In most cases has been adopted the award mechanism based
on the most economically advantageous tender (MEAT), which suppose the
simultaneous evaluation of the price and other quality and technical aspects, including
the environmental dimension. In few cases, PA makes use to the lowest price, and in
Towards Sustainable Public Organizations 1059
others, cases are presented alternative methods that not necessarily relates to the
previous ones.
The criterion of most economically advantageous tender has allowed various public
entities, through a fair approach to weighting the score, to reach a good compromise
between price and quality. In fact, this method has awarded, in procurement, the
competitive actors with respect to the environmental policies but weaker in terms of
the economic proposal. The use of most economically advantageous tender (MEAT)
helps to ensure the compliance of core requirements for the award procedure, such as:
the connection between the criterion award and subject of the contract, a limited
choice options for the PA customers, prior notification of the award criterion within
the tender documents, the distinction between selection and award criterion and,
finally, the respect of EU law (European Commission, 2011). In terms of the economic
and environmental impacts was necessary to differentiate the results of the qualitative
and quantitative cases, distinguishing the presence of information and numerical data.
In terms of economic impact, in 43 cases out of 108, there is not information about
financial results; of which 50% of cases are Mediterranean countries. In the left 46
cases, in 16 cases there was a costs reduction (quantified in euros) or in reduced
percentage, comparatively to previously concluded contracts by traditional procedures
(Figure 5).
Figure 5. The economic impact in the cases examined
In terms of environmental impact, worth noting the positive contribution recorded in
almost all cases studied (102 cases out of 108), such aspect being the central element
of European Commission published cards (Figure 6). In particular, 46 cases are
distinguished by the inclusion of quantitative details in terms of reduction of CO2
emissions (in tons), and greenhouse gas (GHG), electricity use (in kWh), water saving
(in liters). In the other 56 cases, there is the generic description of the environmental
benefits by linking the importance of actions promoted by European Commission
about the relevance of the environmental impact and just one negative (case study
from Germany, but it is negative because in CO2 emission are accounting old and new
emission) .
1060 Strategica 2016
Figure 6. The environmental impact in the cases examined
Conclusions
From the analysis of regulatory measures and policy promoted by the European
Commission is observed a high degree of maturity and attention to GPP. In line with
the context of the analyzed case practices, research findings underline the specific
trajectories of green development practices. In some cases, depending on the
complexity and the economic dimension of the contract, the promoters have used
characteristic features of GPP, such as the joint procurement adopted mainly by local
governments (small dimension) with the aim to get favorable condition in the tender;
the division into sections of smaller technical complexity and cost, therefore, allowing
the participation of small and medium enterprises, by not restricting competition;
finally, the provision of the pre-commercial phase, useful to investigate on the market,
the products or services to be included in the tender, and to assess the needs to be met
through the purchase process. It is not clear, within the sample of the case practices
analyzed, the attention given to social impacts resulting from the purchasing practices,
which, however, are most recent actions taken by the European Commission (24 and
25 Directives of 2014). In addition, it is possible to connect the existence of the
National Action Plan on GPP and the case practices of the countries analyzed with EU
policies. Specifically, 71 cases out of 108 are implemented in the Member States, which
in line with the European Commission Communications, adopted the NAP’s GPP,
provided by COM(2003) 302 and 2005 implementation guidelines. In fact, during
2007-2010 the largest number of countries adopted the plans, while a large number of
them did so in 2007. In this period were realized most of the case practices examined
in the research, and recalls the Communications 397 and 400 of 2008 and 400 of 2009.
The findings underline that GPP is an effective tool for the rationalization of public
spending in the Member States, contributing to the reduction of environmental
impacts, energy savings and the promotion of technological innovation. During the
process of data gathering of background information, useful for mapping GPP
practices, the authors faced the incompleteness of the criteria with which have been
selected the best practices cases. Due to such rationales, the analytical framework of
the mapped cases does not allow to draw conclusions on the progress of green
procurement policies in individual countries. The European Commission, in fact, in
promoting the best practices, does not provide aggregate information or evaluation
judgments but merely presents the procurement activities, by highlighting the
‘excellence’ of each procedure in the application of environmental criteria promoted in
EU. The set of indicators identified throughout the research, laying on the sampled
cases examined, aimed to be, in a broader further research agenda, the first step in
Towards Sustainable Public Organizations 1061
understanding GPP evolution and practice. The model tends to be replicated to more
generic samples and not necessarily to European Union space.
In conclusion, the latest EC policies requires an increasingly strong orientation
towards transparency, competition, reduction of consumption and likewise, an
economic and socio-environmental return as stated by European Commission
Directives “on the adjudication of the concession contracts” (2014/23/EU), in the
matter of “procurement and which revoke the Directive 2004/18/EC” (2014/24/EU),
“on procurement procedures of the service delivery entities operating in water,
energy, transport and postal services and which repeal the Directive 2004/17/EC”
(2014/25/EU). Through these directives on public procurement, the EU Parliament
tries to simplify the structure of the purchase contracts, in order to include
requirements fostering social and environmental responsibility. One of the directive
objectives is to guide the public authorities toward specific social goals at the national
and international level. The recent developments raise, therefore, increasing attention
to the social dimension within procurement and its subsequent transition towards
Sustainable Public Procurement (SPP), a broader concept of GPP, meaning the
government’s attempt to strike the right balance between the three pillars of
sustainable development - economic, social and environmental, in all phases of the
procurement purchase of goods, services and works, (3BL approach), with the
objective to integrate competitiveness and sustainability within the supply chain, along
with the attention through the process, to human and workers’ rights.
References
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Bertoldi, P., Bornás, D.C., Monni, S., & de Raveschoot, R.P. (2010). Linee guida “Come
sviluppare un piano di azione per l’energia sostenibile – PAES”. Lussemburgo:
Unione Europea publishing.
Bettini, P., Masini, D., & Ricotta, S. (2006). Acquistare, vendere e rispettare l’ambiente si
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lex.europa.eu/LexUriServ/LexUriServ .do?uri=COM:2003:0302:FIN:en:PDF.
European Commission (2008). COM (2008) 397. Retrived from http://eur-
lex.europa.eu/LexUriServ/LexUriServ .do?uri=COM:2008:0397:FIN:en:PDF.
European Commission (2009). COM (2009) 400. Retrived from http://eur-
lex.europa.eu/LexUriServ/LexUriServ .do?uri=COM:2009:0400:FIN:en:PDF.
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er.do?code=COM&year=2010&number=2020.
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lex.europa.eu/LexUriServ/LexUriServ .do?uri=COM:2011:0896:FIN:EN:PDF.
1062 Strategica 2016
OECD & PUMA (1996). Ministerial Symposium on the future of public services. Brussels:
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Towards Sustainable Public Organizations 1063
PUBLIC ADMINISTRATION AND CHANGE AND MODERNIZATION
Dakhane NOUREDDINE
University of M’sila Algeria
341 Enasser, M’sila 28000, Algeria
dakhane.noureddine@gmail.com
Zerrouga ISMAIL
University of M’sila Algeria
341 Enasser, M’sila 28000, Algeria
zerougaismail1@yahoo.fr
Abstract. Public administration is a mirror of the community in which it operates, they
affect and are influenced by the environment in which they are located. The conduct of
daily life through the delivery of goods and services to citizens in various fields of
economic, social and cultural and environmental has become the concerns of modern
Governments. They focus on issues and problems that go beyond the primary concerns of
the traditional approach of covering the issues and problems by determining the
priorities according to their seriousness and conflagration in society, such as
unemployment, stagnation, poverty, national security, social security, the lack of power,
organized crime, indebtedness, drugs, the pollution of the environment, water shortage,
the absence of human rights, terrorism, the technological backwardness informational,
administrative corruption, and other concerns and problems facing society according to
local and international conditions. This study focuses on the measures of the public
administration for change and development in a manner consistent with the rapid
developments in the international community, considering modern communications and
information management, technological progress, the impact on the formulation of the
human personality and to the professional conduct of social responsibility.
Keywords: public administration; modernization; development.
Introduction
The reason for the progress of nations goes back to the development of management
science. Many countries have the financial and human resources, but because of the
lack of managerial experience they remained in a backward position. The success of
the economic and social development plans could only be achieved by making good
use of the material and human resources available. The use of available resources
without extravagances or failure depends primarily on the efficiency of the
administration in the areas of activity remnants.
The increased importance of the role of public administration
The indicators of the importance of public administration are the successive increase
in the number of employees in the government administrative machinery and the high
volume of public expenditures (William, 1992, pp.14-17). The increasing complexity of
1064 Strategica 2016
the administrative functions, as well as the serious phenomena that threaten the well-
being of society require the willingness and the interaction between the governmental
administration and the human and material resources in society.
Significant trends in society and their impact on society require a detailed
investigation concerning the adecquate policy for the future. The future of public
administration requires considering strategies covering population growth, structure
and the level of education, the composition of the national economy and service
industries (such as: governmental services, education, health care, banking services,
insurance, transport), productivity industries (such as: manufacturing, agriculture,
construction, mining), the change in the communications where the technological
innovation in the field of computer communications system determins important
implications in society and the economy, rates of crime and punishment, environment
and other important matters.
The historical development of the theories and schools of public administration was
the result of applied side of administrative functions (Robey & Sales, 1994, p.37).
Different theories during the early stages considered regulatory requirements
according to the change in time of the desired environmental conditions. These
requirements were relatedto the structure of the organization (Eager, 1995, p.102),
the use of computers and data banks, the use of formations and diverse organizational
project management systems, the distribution of resources and models of the dynamic
processes (Savage, 1990, p.51), the strategies of the institution (Wright, 1992, p.92),
the entrance to the integrated systems (Charles, 1995, p.83) and other. The managers
approached during that period a authoritarian style due to the easy dispense and
replacement of the wokforce. This led to reactions of the labor movements, which
demanded for the rights of the workers, for the welfare of the employees.
In the 1940s, increased attention was given to psychological research and social focus
in both the military and the civilian environments. That research helped managers to
adopt incentive methods in the application of the theories of the meeting in the
industrial field and turned into a strategy for managers of the use of methods of
autocratic authoritarian ways to psychological and social control of their employers in
order to increase productivity. In the 1950s, management methods were used,
stressing on objectives and results as a means to increase profits and emphasis on
responsibility. This approach led to decentralization in the traditional regulatory
hierarchy methods in the organization. As a result, managers focused on profitability,
far-reaching recurrent organization, as well as on the use of the evaluation system in
order to adapt to the demands and conditions of the future. In the 1960s, the focus was
on "Public official" who possesses extensive information on the economy and social
life. The Director became measured on the basis of the success of his subordinates,
instead of the activities. The belief prevailing in the period was that every case is
different from another, and that the aproch of the traditional management is no longer
sufficient.
In the 1970s, the perception of the institution as an integrated and comprehensive one
emerged. The manager to deal with a secondary-system, with illicit organization
involving individuals and property, money and resources. The Director became more
aware than previously, of the relationship between the activities and objectives of the
basic institution. In the 1980s, the focus came on the circumstances known to
Towards Sustainable Public Organizations 1065
administrative work and the need for knowledge of managers. They needed new skills
to help them solve the problems of situational contingency management, as a result of
changes in the economic environment. There was a growing interest in possible results
of the decisions, in the introduction of flexibility to plans and processes, increased the
tasks of coordinating director because of the complexity of the organizational
structure. It was registered an increased attention to the organizational behavior, to
face the positions which require innovation and initiatives. We must not lose sight of
the strategies used in that period such as zero budget, the environmental and social
responsibility of management, reduced costs, return to the scientific management, and
use of quantitative methods.
Starting with the1990s, increased emphasis was set on technology and
communications, computers, the economy in cost, reorganization, restructuring,
demobilization of the surplus, the use of information systems and dynamic processes.
It is no longer the size of the organization or the amount of capital the indication of the
validity and viability of the work, but the costs, effectiveness, adaptation to
environmental conditions and responsiveness to the requirements of the society which
have become more important. They are meant to improve the management and
delivery of services to the citizens through the composition of the agencies for the
completion of the operational functions of the government, "include a document
Citizen" on the following principles (Bendell et al., 1999, pp.81-20):
- specification of the services provided by the state standards compared with the rates
of actual performance;
- information and openness;
- choice and consultation;
- courtesy and helpfulness;
- putting things right;
- value for money.
New concepts have been adopted, but also there is a turn to old but still useful ones,
such as: operations research (OR), operation research and the behavior of the
organization (OB), organization behavior and the climate of the organization (OC),
organization climate and the evolution of the organization (OD), organization
development and effectiveness of the organization (OE), organization effectiveness and
the theory of x and y and z in the organization and others.
Bureaucracy and democracy form the only system that can meet the changing
demands of contemporary civilization, democracy as a system of values. This approach
includes such things as free contacts regardless of the Authority, the reliance on the
unanimous consensus rather than coercion, or even bargain compromise as a way of
conflict management, the emphasis on the professional qualifications and knowledge.
The extent to which the non-governmental organization of decision-making and the
accomplishment of the tasks entrusted to it depends very much on the individuals who
have no control over the administrative work, and include clear rules and
specifications office operations in order to achieve the principle of efficiency and
equity in the treatment of the auditors. Not without bureaucracy in democratic
societies of criticisms such as bureaucratic described as greater than it must be as well
as it has wide authorities, which requires curtailed, they use of large numbers of staff
for more than the real need, they need to cut also high cost and obsolescence and
1066 Strategica 2016
inefficiency, and not to respond to the requirements of society - all these negatives
require specific action reorganization troubleshooting and the conversion of some of
its activities to the private sector and to develop programs to contribute to the
formulation and implementation of citizens, This can be the comparison between the
requirements of democracy and the requirements of the bureaucracy as indicated in
the following table:
Table 1. The requirements of the government administration and the requirements of
democracy (Rosenbloom, 1993)
The democracy requires The bureaucracy requires
1 Equality 1 A hierarchical
2 Change the centers 2 Continuity and seniority
3 Freedom 3 The leadership of the orders
4 Multilateralism 4 An integrated unit
5 Citizen participation 5 Participation based on experience
6 Openness (Transparency) 6 Confidentiality
7 Collective participation 7 Informal
8 The legitimacy depends on vote 8 The legitimacy based on experience
Democracy tends to configure organizations adapted to promote freedom of
expression and participation in decision-making, to respond to the majority of the
dealers and opening up access to information. Democracy becomes a practical
necessity wherever there is a social system to compete in order to survive under
conditions of constant change. This view on democracy includes:
- free contacts regardless of the rank and authority;
- the reliance on the consensus, rather than imposed opinion or bargaining power;
- adoption of the influence of professional qualifications and knowledge rather than
personal indulgence.
The emphasis on the tasks and encouraging the expression of human feelings
The increased specialized, professional and elevated position of the individual
(employee) requires the development and deepening of the concept and practice of
democracy in the administrative operations of the State. His would give the
opportunity to government employee to connect through the communications media
at all administrative levels. It will be the emphasis on continuous learning organized
thinking and programed instead of the routine specific watches that will change the
nature of the work, of the decision-making, the processes involved in the development
and the provision of services. The processes will be turned from the local environment
and culture to a global environment, facilitated by the technological information.
Increased quality, diversification and morality will develop a new environment where
the responsibility of managers is clearly toward the consumer.
The process of interaction between the government and the citizens represent the
operations and mutual political processes. These means will help us to bureaucratic
accountability and thus lead to more democracy in the governmental administration.
These will occur in future changes, social reforms, political and administrative
measures embodied in the construction of new institutions which replace
Towards Sustainable Public Organizations 1067
authoritarian institutions. This could impact structural structures and the interrelated
issues in the community would disappear.
That the possession of State institutions which allows for the representation of the
community and responsible government does not necessarily mean being democratic.
We note that the rigid manifestations of bureaucracy has subdued devised and
contributed to the political process. A the same time, they have changed and adapted to
the fundamentals of democracy because of administrative organizations.
The excessive number of hasted resolutions issued for sometimes exceptional
problems, sometimes unusual decisions, as well as the lack of qualifications of
leadership prove the significant shortage of skills required for the process of political
decision-making and governmental activity. This makes governmental institutions
reels in a sea of resolutions, thus deteriorate the possibility of the government in
decision-making as a result of the methods and political institutions, administrative
bodies operating in the state. These circumstances generate the question of how to
prepare and adopt a long battle for radical reforms or even the cancellation of the
familiar institutions we have such as the parliament, the Congress, the Central
Committees and Supreme Councils, as well as the ruling parties in some countries, the
buildings of the giant ministries, the civil service and bureaucracy inherent
constitutions and court systems. All of these are organs not suitable to democratic
governments in the future (Bowman & Kearney, 1996, pp.204-209).
The future of the General Administration
The difficulties faced by the skills needed by government officials in the future far
outweigh the skills needed by their counterparts in the private sector to face the
current changes. Therefore, a government director needs in the future to acquire new
skills. The mechanism (the traditional) met in public administration and structure has
become obsolete and could not address new issues which confront us. The public
administration always provides partial solutions to problems or cosmetic changes.
The administrative organizations could become more effective and efficient through
internal reforms and programs such as participatory management or new
management objectives and planning system (Lane, 1978, p.559), programming and
budget, despite the fact that such types of solutions have benefits but their attempts to
become hollow when assessing the change and development required in non-
governmental organizations, as well as the rapid development reflected the quality in
the world of technology and information. The challenge is located in the discovery of
what is important to improve: the management of operations in the State
organizationss, structural adjustment, modified behavior. All these are important and
are expressed in the theories of the Organization but must follow what is happening in
the field of technology and the environment, linked to governmental administration.
The last decade of the twentieth century witnessed major changes in the area of
efficiency and management as a result of the emergence of the movement of the
Department of comprehensive quality. THe spillover effects in private organizations
and intergovernmental organizations with a view to the development of institutional
performance, and the concept of quality confirms the economy of resources and
1068 Strategica 2016
coordination between the producer and the consumer, and the management of human
resources.
Three new values of the concept of quality have emerged (Scott, 1998, pp.349-350):
- the focus on revisers or consumers;
- constant improvement of service;
- work in the spirit of the group in the organization.
And all these values to search for new methods of work, evaluation, follow-up of each
step of the job description for each employee working in the organization are new
Trends indicating the transition from the organizational bureaucracy to networking,
and from vertical division of labor to the horizontal division. This approach will
determine a new layer of technocrats or knowledge workers, rather than staff
bureaucrats. It leads to the emphasis on continuous learning and organized thinking
instead of the routine specific to watches. It will change the nature of the work of the
decision-making of the commodity to the provision of the service. It will be turned
from an emphasis on the local environment and culture to a global environment and
technological information. Quality, diversification and ethics are the framework for
developing a new environment where the responsibility of managers is clearly toward
the consumer society and the environment.
There must be recognition of the inevitability of the constant change and the
challenges unforeseen in the field of governmental administration and its institutions,
whether in its structure, their behavior or their technology. It is necessary to confront
these changes with theoretical studies. We must focus on the problems facing public
administration and the expected matters before they happen. It is, therefore, adequate
the investment in the continued search and the development of necessary
arrangements to ensure an appropriate structural adjustment in the organization of
the General Assembly, having in mind the completion of behavior changes of the public
employee, the allocation of strategic investments in thought and mental administrative
practice, the provision of necessary maintenance in the level of technology used, and
the creation of a suitable work environment.
Conclusion
The development of the management of public administration lies in the management
of a network of public organizations within the perimeter of evolution. It is
characterized by continuous change based on the values and achievements of
irreversible democracy, freedom and fairness in compliance with the concept of value.
The important subject is the interest in developing General Services Administration,
which is the coordination between the various independent organizations, which
means the implementation according to most political goals conflicting with each other
and unclear.
The development of public administration performance management aims to create a
balance between the size of the organizations or groups of service organizations and
its natural and social surroundings. Achieving this goal requires taking into account
many factors, including the limited resources in the vicinity of the organization, the
relationship between the organization and customers, which cannot rely entirely on
Towards Sustainable Public Organizations 1069
the supply of services, the need for the organization to conduct its relationship with
the public and get upheld its objectives. This work to examine and re-examine
continuously public organizations has the ultimate goal to get the public
administration management lack f legitimacy in the era of globalization that we live in.
References
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London: Pitman Publishing.
Bowman, A.O’M., & Kearney, R.C. (1996). State and local government. Boston: Houghton
Mifflin.
Charles, C. (1995). The total manager. London: Pitman Publishing.
Eager, W. (1995). The Information Payoff. Englewood Cliffs: Prentice-Hall.
Johnson, W.C. (1992). Public administration policy, politics, and practice. Guildford:
Dushkin Publishing Group.
Lane, F.S. (1978). Current issues in public administration. New York: Martins Press.
Robey, D., & Sales, C. (1994). Designing organizations, Boston: Richard Irwin.
Rosenbloom, D.H. (1993). Public administration: understanding management, politics,
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Savage, C.M. (1990). Fifth generation management. Bedford: Digital Press.
Scott, W.R. (1998). Organization: rational, natural, and open systems. Upper Saddle
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Wright, P. (1992). Strategic management. Boston: Allyn and Bacon.
1070 Strategica 2016
NEW TECHNOLOGIES FOR SUSTAINING DEMOCRACY AND
PARTICIPATION
Mauro ROMANELLI
University of Naples Parthenope
13 via G. Parisi, 180132, Napoli, Italy
mauro.romanelli@uniparthenope.it
Abstract. New technologies lead public organizations to sustain public trust, promote
public interest and behave as responsive institutions fostering citizenship and
collaboration in order to uphold values of representative democracy in front of an
increasing disenchantment of citizens for traditional representative and democratic
institutions facing the challenge of dealing with a mixed policy embracing elements of
representative and direct democracy. Technologies are driving public institutions to
sustain a participatory democracy and leading citizens to act as active co-producers of
social, democratic and public value. Sustainability of public organizations seems to rely
on embracing new technologies for opening up to contribution and participation of
citizens in order to make effectively participatory and democratic government
agencies and public administration.
Keywords: new technologies; public organizations; e-democracy; e-participation;
citizens.
Introduction
The role of information and communication technologies (ICTs) is to improve the
relationship between government branch agencies and citizens in terms of public
services and democratic values to be delivered and transmitted for future generations
and wealth of community to support the development of society. The Internet and the
technologies of information and communication help public organizations to sustain
public trust and promote public interest as responsive institutions encouraging an
active citizenship and collaboration by fostering democratic participation (Denhardt &
Denhardt, 2003; Vigoda, 2002). Public organizations and institutions have to revitalize
the public image in order to cope with a growing disengagement of citizens by
providing new mechanisms of governance and collaboration (Bingham, Nabatchi &
O’Leary, 2005) in order to support the structures of democracy by enhancing
participation of citizens as means for creating and maintaining public value relying on
dialogue and partnership between public organizations and various stakeholders. The
aim of this paper is to elucidate how technology can drive public organizations to
proceed towards a sustainable development by strengthening forms of democracy and
encouraging the participation of citizens. This study is based on archival and
qualitative data by analysis and review of the literature on the public sector for
investigating how the advent of new technologies can help the development of
democracy and participation connecting citizens with public administration open to
accept the contribution of citizens to building knowledge and designing shared
policies.
Towards Sustainable Public Organizations 1071
Public organizations as responsive institutions seeking legitimacy
Public organizations as responsive institutions have to serve the public interest as
result of dialogue with citizens based on a shared leadership and respect for people
developing sustainable policies by making a meaningful contribution to community
through a process of effective collaboration opening up to learning and change by
interacting with citizens as partners (Bryer, 2006; Denhardt & Denhardt, 2003;
Denhardt & Denhardt, 2000; Vigoda, 2002). Public organizations tend to contribute to
democratic life by maintaining public trust underlying democracy gaining legitimacy
and maintaining the organizational reputation as a set of beliefs about capacities,
intentions and missions (Moynihan, Karpenter & Krause, 2014) seeking sustainability
as a principle of governance driving decision-making processes that imply a higher
degree of collective action across policy sectors (Fiorino, 2010). Today, public
organizations having to interpret evolving values and preferences of communities
should promote citizenship by encouraging public discussion, dialogue and integration
with the community. Public organizations tend to set the agenda and facilitate
sustainable solutions for public problems in order to realize the public interest by
encouraging participation of citizens and shared responsibilities by involving citizens
in government activities (Bourgon, 2007).
Building better relationships between public administration and citizens
through technology
Technology has made possible a greater access to the policy process as result of
dialogue and shared values by enhancing the quality of citizens’ participation
(Denhardt & Denhardt, 2000). The advent of the technology is driving public
administration to redesign the relationship with citizens in terms of building both
sustainable e-government and e-governance. While e-government refers to use of
information technology to enable and improve the efficiency with which government
services are provided to citizens (West, 2004), e-governance comprises the use of ICTs
to support public services, government administration, and democratic processes in
order to engage and improve an interactive relationship between government and
citizenry. Public institutions increasingly tend to use the technologies of information
and communication (ICTs) for involving citizens in policy-making in order to foster
transparency, openness, and legitimacy. Public organizations are assessed because of
delivering the expected value for citizens by developing e-government initiatives, by
enforcing democratic and public values as impartiality, equity, honesty and fairness of
government emphasizing a greater responsiveness from public administration to
citizens (Cordella & Bonina, 2012). ICTs lead to new forms of governmental legitimacy
and spaces of governance that reconcile the enforcement of outcomes beneficial for
society and aspirations of individuals, groups, and communities (Navarra & Cornford,
2012). Information and communication technologies (ICTs) have an enabling role in
establishing transformational change in the public sector by enhancing democratic
processes and providing a dynamic environment for ongoing learning and action
(Dawes, 2008) by making public organizations as open, responsive institutions willing
to serve the interest of citizens (La Porte, Demchak & Jong, 2002). The introduction
and promotion of new technologies of communication and information serve to solve
the disconnection between people and governmental institutions in order to foster the
public voice (Cavanaugh, 2000). New technologies help the transition of public
1072 Strategica 2016
organizations in a new digital era for achieving a better government (Lips, 2012) by
providing a clear leadership; to support the open and transparent government; by
strengthening cross-government business capability; by improving operational ICT
management. E-government as the use of information technology to enable and
improve the efficiency of government service delivery contributes to enhancing the
perception of responsiveness of public administration and reinforce process-based
trust by sustaining interaction with citizens (Tolbert & Mossberger, 2006). The
Internet is driving citizens to expect governments to promote transparency and
interactivity in order to engender public trust (Moon, 2003).
Sustaining democracy through new technologies: lights and shadows
Technology is opening up a new season for democratic systems, seems to be putting
the democracy first by involving the citizen as the not merely recipient but the
proactive user of technological tools and interpreter of will, and rights (Denhardt &
Denhardt, 2003). The issues of the advent of new information and communication
technologies are the e-government and e-democracy as innovative forms of managing
public services and governing res publica by reshaping public administration in the last
decade and redesigning governance in the future making citizens closer to
governmental and public institutions (Lee, Chang & Berry, 2011). There are different
definitions and perspectives about what is e-democracy. «E-Democracy consists of all
electronic means of communication that enable/empower citizens in their efforts to
hold rulers/politicians accountable for their actions in the public realm» (Trechsel et
al., 2003, p.11). Päivärinta and Sæbø (2001) tend to develop a concept of e-democracy
as a new and competitive form of communication and interaction. «The concept of E-
Democracy refers to the use of information and communication technology (ICT) in
political debates and decision-making processes, complementing or contrasting
traditional means of communication» (Päivärinta & Sæbø, 2001, p.3). Thereby, the
success of electronic democracy relies on the capacity to support and enable new
forms of publicness within a public sphere (Tsagarousianou, 1998). Technology helps
engage people in the development of democratic processes through enabling
opportunities for obtaining information as requisite for engaging in deliberation,
second phase desirable for participating in decision-making (Tsagarousianou, 1999).
The quality of democratic governance is enhanced by Internet technologies if citizens
are better informed (Kakabadse, Kakabadse & Kouzmin, 2003). The Internet and the
technologies of information and communication making accessible data and
information about parliamentary institutions and the legislative process lead citizens
to exert influence on policy making (Grönlund, 2001) helping to reinvigorate
traditional representative arrangements by leading representative systems to become
as more decentralized, accessible and responsive (Zittel, 2003). ICTs contribute to
better inform citizens about public issues and law making, facilitate debate by citizens
approaching their parliamentarians before the vote (Milakovich, 2010). Thereby, ICTs
positively contribute to democratic practice only in virtue of existing strong
democracies (Malina, 1999). In modern societies characterized by complex decision-
making, it is evident that political and representative assemblies tend to behave as
mediators and referees in the transition from the representative democracy unable to
solve uncertainty and complexity to governance networks (Kljin & Skelcher, 2007).
Models of democracy in the information era develop along a continuum in which the
parliamentary chain of steering may play a critical part or new kinds of democratic
Towards Sustainable Public Organizations 1073
practice are pointed (Bellamy, 1999). ICTs may be used as a means to reinforce the
position of institutional politics in the system as a whole or to weaken this position and
spread politics into society or outside the borders of the political system (Van Dijck,
2000). Internet technologies permit to restructure the linkages within the democratic
representative system as to supplement the existing channels of political
communication and information in virtue of Internet global capacity networking
(Norris, 2000). Parliamentary institutions are embracing new technologies to connect
with the public and inform, interact and engage citizens by coping with the increasing
decline of confidence in democratic and public institutions disengagement and distrust
of citizens feeling unheard by politicians (Lusoli, Ward & Gibson, 2006) as to avoid to
become marginalized institutions under increasing pressure to present themselves
accessible, transparent and open to the public (Coleman & Spiller, 2003). Thereby,
some trends are perceived to be able to undermine the primacy and legitimacy of the
electoral chain of command in western representative democracies: the overtaking of
conventional politics by electoral media; the power of party discipline over
representative institutions: the control of representative institutions by political
executives; the displacement of decision-making into policy networks; the hollowing-
out of the state. Thereby, representative institutions dealing with a mixed policy that
embraces parliamentary and post-parliamentary forms tend to serve as symbols of
political integration maintaining the functions of representation and accountability
(Raab & Bellamy, 2004).
E-democracy can employ different techniques for increasing the transparency of the
political process, for enhancing the direct involvement and participation of citizens and
improving the quality of opinion formation by opening new spaces of information and
deliberation (Trechsel, Kies, Mendez & Schmitter, 2003). There are different models of
e-democracy in which ICTs open up to different possibilities coherently with role
citizens can play. While in a liberal democracy, ICTs help the quality of information
exchange between government and citizens included in decision-making processes,
ICTs contribute to strengthening participation by involving citizens in decision-making
processes coherently with the development of a deliberative democracy in which
citizens have a defined role in decision-making processes. In a thin democracy, citizens
act as customers of information gathered and disseminated by political institutions by
using ICTs. In a strong democracy, the citizen can act as an opinion former. ICTs focus
on discussion. Participation is seen as a means for providing education and enhancing
an increased understanding about society (Ǻstrom, 2001; Päivärinta & Sæbø, 2006). E-
democracy initiatives and projects may take and follow different shapes confirming
that a technological and democratic linearity does not exist (Grönlund, 2003). There
are some shadows and conservatory aspects that technology can deliver despite
growing participatory and democratic potential and value. Technology may become a
rhetorical tool for politicians that may oppose a civic engagement that could obscure
traditional political representation (Maherer & Krimmer, 2005). Governmental
institutions seem to assume managerial models of interaction that improve the flow of
information between government and citizens as customers despite both consultative
and participatory models for a better policy through interaction and consensus
(Chadwick & May, 2003). The institutional context and the norms of the democratic
governance provide the conditions that influence the shape of e-democracy practice.
Thereby, the Internet appears to reinforce existing patterns of authority and influence
(Rethemayer, 2006). The actors using ICTs tend to reproduce social structures or
potentially challenge them introducing change in the political process (Parvez &
1074 Strategica 2016
Ahmed, 2006). The risk of rhetoric, apparent and illusionary use of technology for
democracy tends to emphasize the citizen as actor proactively playing for making
difference as effective decision-maker (Fuchs, 2009).
Sustaining e-participation: rediscovering the active role of citizen
The role of technology is to increase amounts of informal communication for
sustaining the creation of social capital in communities as a factor encouraging public
participation (Komito, 2005). Online citizen participation can enrich democratic
processes by enabling public agencies to receive broader and more diverse opinions
from citizens than those available through traditional means of off-line participation.
During the last decade, the public policies of many countries support the development
of e-participation initiatives for engaging citizens’ society and revitalizing democracy.
Today, democratic institutions are facing challenges related to making choices
between deliberative elite and deliberative masses in terms of the trade-off between
quality and equality of deliberation (Mele, 2005). A formal political system following a
path of democratization should be oriented towards new participatory, deliberative,
associative and direct forms of democracy (Anttiroiko, 2003). New technologies of
information and communication help representative institutions to sustain public trust
developing forms of direct dialogue with citizens in order to survive in their current
forms. E-democracy relates to e-participation as knowledge, interactive and
collaborative process in order to empower citizens for stimulating contribution to
greater cohesiveness and inclusion (Ahmed, 2007). As the public is becoming
disenchanted with forms of representative democracy, new forms of electronic
communication help to support a democratic commitment by enabling a new dialogue
between citizens and politicians coherently with the discovery of public values and the
belief that government policies will be related to participation of community and
people (King, 2006). The usage of ICTs should permit to enhance the quality of political
participation enabling citizens to connect with parliamentary institutions for
improving the policy process. Thereby, public institutions seem to be mainly interested
in one-way information provision to citizens without searching the feedback of citizens
about legislation or policies (Östling, 2011). The Internet provides a means of seeking
the views of constituents on public policy. New technologies support e-democracy by
encouraging participation of citizens in policy making in terms of services delivery and
outcome, quality, efficiency and equity, civic engagement, deliberative and democratic
effects (Sæbø, Rose & Flak, 2008). Three different stages are presented according to a
growing scale over time in relation to OECD framework (2003) to take part in the
decision-making and influence the policy agenda: information as a one-way
relationship in which government make available information for citizens; in the
consultation level citizens are encouraged to contribute their views on a particular
issue; in the active participation citizens are empowered by actively participating in
the policy making process (partnership). According to Macintosh (2004) three levels of
participation are identified: e-enabling to support the access to the internet taking
advantage of the large amount of information available; e-engaging as concerned with
consulting a wide audience to enable contributions and support debate on policy
issues; e-empowering to support active participation of citizens as producers of policy.
ICT tools (ranging from web portals to consultation platforms, e-petitioning systems as
examples) can be implemented to change or reinforce parliamentary institutions
governed by path depth processes, support more participatory forms of citizenship
Towards Sustainable Public Organizations 1075
and facilitate a two-way dialogue reinforcing participatory forms of citizenship and
public involvement based on a two-way dialogue. Web portals help to bridge
representation and communication functions. The e-petitioning system is citizenship-
oriented and focuses on the interaction between citizens and public institutions like e-
consultations (representation oriented) (Pratchett, 2007).
Discussion and conclusion
Technology seems to offer new opportunities for connecting and reconciling public
administration and citizens by building and enforcing new forms of representative
democracy by enhancing the active participation of citizens. New technologies drive
public organizations to behave as responsive institutions engaging an aware and active
citizenship for policy contribution. Putting online information and data seems not to be
enough in producing a democratic participation and enlargement of citizens’
involvement if the main actors of political representative systems do not change in
searching for an effective and valuable engagement of citizens to be listened about
their preferences on policymaking (Cardoso, Cunha & Nascimento, 2006). Only an
equalized access to technology can contribute to involving people to participate in
political and democratic decision-making processes (Krueger, 2002). Many people
tend to be excluded because of the digital literacy divide (O’Donnell & Henriksen,
2002). Building sustainable public organizations relies on constructing and
maintaining a bridge between public administration and citizens as the main
shareholders by involving and engaging people by embracing technology for
rediscovering the values of democracy, fostering the participation of citizens in public
affairs and policy. Thereby, the design and implementation of e-participation
initiatives seem to be still at early stages and in its infancy so that the future
developments and advancements of the relationship between technology and
democracy will depend on of the use of communities, politicians, movements and
citizens too. Public organizations strengthening the channels of two-way
communication for active participation by embracing an approach based on citizen-
centered collaboration have the opportunity to encourage and foster a participatory
democracy technology-driven by linking forms of representative and direct democracy
in order to serve a legitimizing function as necessary intermediaries opening up to
contribution of citizens through co-production of public values in terms of
transparency, governance, integrity, social and democratic values. Sustainability of
public organizations seems to rely on embracing new technologies for connecting with
citizens opening up to contribution and participation in order to make effectively
participatory and democratic government agencies and public administration.
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Towards Sustainable Public Organizations 1079
REDISCOVERING PUBLIC SERVICE MOTIVATION WITHIN PUBLIC
ORGANIZATIONS
Mauro ROMANELLI
University of Naples Parthenope
13 via G. Parisi, 180132, Napoli, Italy
mauro.romanelli@uniparthenope.it
Abstract. Public organizations have to rediscover the importance of public interest as
result of dialogue and respect for people and sustain the public service motivation of
employees for managing change and promoting collaborative relationships with citizens
moving towards a better responsiveness. Training and education contribute to hybridize
the administrative and organizational culture of public institutions overcoming legalistic
and bureaucratic logics by exerting influence on ethics and behaviors of public employees
for driving change.
Keywords: public service motivation; public interest; public sector organizations;
training and education.
Introduction
Public sector organizations serve the interest of national community rather than the
generation of profit for government and differ from private sector organizations
(Parker & Gould, 1999). Public and private organizations differ mainly with regard to
objectives and setting (Lane, 2009): governments accomplish social objectives
delivering services in the interest of a national community, whereas private
enterprises do business to make money by maximization of profit for their owners;
private management is oriented towards the market that shapes the success of
enterprises determining opportunities for profitability. Differences between private
and public sector with regard to human resource management, organizational policies
and practices seem to rely on the persistence of a public service ethos among public
employees (Boyne, Jenkins, & Poole, 1999). Effective government agencies tend to
have high attractive mission and valence, high levels of public service motivation as a
general motivation to serve the interests of a community of people in terms of
contribution to general and valuable public service. The perceived linkage of the
mission to public service values can contribute to enhancing mission valence and
mission motivation. Different factors contribute to enhancing public service motivation
(PSM): high mission valence or attractiveness; a strong organizational culture;
effective leadership behaviors in terms of commitment to mission, effective goal
setting and administrative and political coping (Rainey & Steinbauer, 1999). Public
organizations have to promote investments in human capital reinforcing training and
professional education of public employees in order to support public sector reform
leading to a managerial and cultural change in terms of new norms and values,
practices and behaviors. Education and training contribute to developing change
leading employees to learn values coherently with new public service and interest as a
mission of public organizations. The aim of this paper is to explain that changing public
organizations following the public interest should rediscover the importance of public
1080 Strategica 2016
service motivation of employees for managing and sustaining an enduring change. The
study is based on archival data relying on a literature review to sustain the discussion
with regard to: rediscovering responsive public organizations beyond promises of
Npm; understanding the concept of public service motivation; developing training and
education of public employees as strategic source to sustain motivation of public
employees for leading government to restore trust with citizens.
Understanding the service motivation within public organizations
Fredrickson and Hart (1985) refer to the patriotism of benevolence as the love of one’s
country and non-instrumental of the others, founded on knowledge of and belief in
democratic values and important motivation for public servants and public
administrator driving a responsible organization in order to reconcile bureaucracy and
democracy (Burke & Clark, 1989). Public employees tend to manifest higher attention
to service than private employees. Public service motivation (PSM) as a universal
concept tends to be an important issue in studying public administration having an
impact on human resource management. The attention to more institution-conscious
motivation is useful for better understanding the difference between private and
public sector organizations (Wise, 2000). PSM leads to behaviors that benefit the
public (Kim & Vandenabeele, 2010). The term public service motivation implies the
specific motivation associated with public service and the desire to engage in
meaningful public service. PSM is a broad, universal but multifaceted and elusive
concept varying over time, in relation to the public image of government service,
taking different forms in different agencies and service areas (Rainey, 1982). Public
service motives are at the roots of the behaviors and actions taken to achieve outcomes
that serve the public interest (Wise 2000). The nature of public service demands a
sense of loyalty on the part of public employees. There is not a wide accepted
definition of PSM. There are many and different definitions of PSM proposed in several
studies. «PSM is the motivational force that induces individuals to perform meaningful
public service» (Brewer & Selden, 1998, p. 417). PSM is still defined «as a general
altruistic motivation to serve the interests of a community of people, a state, or human
kind» (Rainey & Steinbauer, 1999, p.23). Following an institutional and organizational
path, PSM is defined as «an individual's predisposition to respond to motives grounded
primarily or uniquely in public institutions and organizations» (Perry & Wise, 1990,
p.368). PSM is likely to be positively related to the organizational commitment of an
individual (Perry & Wise, 1990) as «the belief, values and attitudes that go beyond self-
interest or organizational interest, that concern the interest of a larger political entity
and that motivate individuals to act accordingly whenever appropriate»
(Vandenabeele, 2007, p.547). A wide definition of PSM incorporating ethics, roles and
beliefs comprises «the belief, values and attitudes that go beyond self-interest or
organizational interest, that concern the interest of a larger political entity and that
induce, through public interaction, motivation for targeted action» (Vandenabeele,
Scheepers & Hondeghem, 2006, p.15). PSM tends to exert influence on public sector
attractiveness in terms of the preference for working with public employers and does
not replace other types of motivation. Individuals with high PSM will be more likely to
seek public employment. PSM tends to exist before entering government at a pre-entry
level (Vandenabeele, 2008). Rational (as participation in the process of policy
formulation), norm-based (as a desire to serve the public interest, loyalty to duty and
to the government as a whole), and affective (patriotism of benevolence) theoretical
Towards Sustainable Public Organizations 1081
bases are identified (Perry & Wise, 2000). Thereby, PSM is part of a behavioral process
in which public service motives lead to behaviors that benefit the public. According to
Perry (1996), the typology of motives driving service motivation comprises at least
four dimensions: attraction to public policy making, commitment to the public interest
and civic duty, compassion, and self-sacrifice. Public service motives are based on self-
sacrifice and fall into three categories: instrumental motives are related to behavior;
the value-based motives are related to value and ethics; the identification motives are
related to attitude (Kim & Vandenabeele, 2010).
According to Kim and Vandenabeele (2010), PSM emerges as a combination of
attraction to public participation, commitment to public values, compassion and self-
sacrifice. Historical and institutional differences might explain the different pattern of
PSM in different countries. Values, beliefs, and attitudes concerning public service are
not the same in the countries (Vandenabeele, Scheepers & Hondeghem, 2006). The
institutions in which individuals operate are embedded within the environment,
embracing public service values (interest in politics and policy making, self-sacrifice,
democratic values) and responding to basic psychological needs located within each
individual in order to better internalize the individual’s public service identity
(Vandenabeele, 2007). PSM is an issue of organizational environment in which
employees operate. Self-sacrifice can drive employees with higher PSM to support
organizational change (Wright, Christensen & Isett, 2013). Public organizations should
create an environment in which employees feel they can contribute both to the public
goal and to an organization performing valuable services (Moynihan & Pandey, 2007).
The importance of the organizational mission may increase employee work motivation
in the public sector (Wright, 2007). Public organizations should support the
motivational power of public service (Wright, 2007) and adopt strategies that
complement PSM for managing an important resource as individuals strongly
motivated to perform public service when they believe that the public service mission
could be compromised (Brewer & Selden, 2000).
Changing responsive public organizations rediscovering the public interest
In 1980s-1990s, new public management (Npm) doctrines have driven cultural and
managerial change within public sector organizations emerging as theoretical and
managerial response to inefficiency of the traditional model of managing res publica
leading public organizations to import managerial practice from the private sector
focusing on re-organization of public bureaucracies disaggregated into agencies more
flexible and output oriented, on financial efficiency and performance measurement, on
separation of politics from management, reducing government functions through
privatization (Hughes, 1994): stressing the private sector styles of management
practice towards flexibility in hiring and rewards; a stress on greater parsimony and
discipline in use of resources doing more with less, by cutting direct cost and resisting
to union demands (Hood, 1991). Thereby, public management reforms driven by Npm
ideas have shown difficulties of applying, some limits and contradictory effects. There
are some constraints of the management state (Lane, 2009): neglect of meaning, no
preservation of intangible values, unresponsiveness to requests and demands of
citizens, democratic deficit within institutions. Npm reforms stimulating competition
mechanisms increased the chances of unethical behaviors associated with
individualistic values reversing equity and legality as traditional values of public
1082 Strategica 2016
servants (Maesschalck, 2004). Npm doctrines contributed to deteriorating the
corporate culture, the traditional work ethos and non-functional values, increasing a
decline in motivation and work satisfaction, greater workload and stress (Diefenbach,
2009).
The need of achieving efficiency, efficacy and effectiveness do not comprise all values
and principles informing dynamics and life of public organizations. Innovation and
traditional values of public service tend to coexist within public management reform.
Thereby, public management reforms tend to be also inspired by postmodern values
that emphasize the demand for greater social equity as justice as fair treatment,
inclusiveness and equity in compensation, policies to harmonize the differences in the
conditions of employment between government and the private sector; the
humanization that refers to the employee as an individual manifesting specific needs
as growth and development and implies to support programs for training/educational
opportunities for sustaining the human resource development as related to lifelong
learning for a better quality of life in which learning is a shared goal between the
employee and the employer; the democratization and empowerment relate to expand
access to power and influence on decision-making by engaging citizens, promoting
participative decision-making (Wise, 2002). Even if the interaction between public and
private organizations is leading to a new public service ethos concerning honesty,
community service and competition, consumer choice (Brereton & Temple, 1999),
lawfulness, incorruptibility and impartiality tend to emerge as prevailing and specific
values within context of public organizations (Van der Wal, De Graaf & Lasthuizen,
2008).
Creating public value relies on public manager sharing responsibility with other
officials and citizens to decide what is valuable to produce with public resources by
interacting with people to determine and organize the ends and means of service
delivery and production (Moore, 1995). Public institutions have to serve the public
interest as result of shared leadership based on respect for people dealing with
producing public services positively judged by citizens moving towards a better
responsiveness and effective collaboration with citizens as partners in the work of
government (Vigoda, 2002a). Responsiveness of public administration relying on the
quality of human resources system and public servants (Vigoda, 2000) implies a
listening administrator in order to promote democratic accountability and
administrative effectiveness, by helping public servants to engage in reciprocal
communication with the public (Strivers, 1994). Public organizations producing high
performances tend to serve the people leading to involvement and participation of
citizens sharing ideas and knowledge with public officials (Vigoda, 2002b). Public
organizations should ensure that principles of democracy are maintained serving the
public interest as result of dialogue about mutual or overlapping interests. Public
servants should attend to law, community values, professional standards and citizen
interests (Denhardt & Denhardt, 2003). The public interest is better advanced by
public servants committed to making a meaningful contribution to society by helping
citizens to meet their shared interests (Denhardt & Denhardt, 2000) for building
collaborative relationships with citizens involved in government activities,
encouraging shared responsibilities and understanding of public values (Bourgon,
2007).
Towards Sustainable Public Organizations 1083
The role of training and education as means for promoting motivation to public
service
Human resources practices help to improve and achieve high performances in public
sector organizations (Gould-Williams, 2003). Sustaining successful change within
public organizations relies on providing resources in terms of training employees,
developing new processes and reorganizing the structure, on employees able to learn
new behaviors drawn by new policies or innovation in order to effectively
institutionalize change as embedded in the institutional context (Fernandez & Rainey,
2006). Reinventing government relies on investing in human resources and
professionalism of public employees by sustaining education and training as oriented
to improve the quality of public services for citizens and society (Crozier, 1988).
Change may proceed through the people educated to values, beliefs, and ideas that
effectively serve to restore the relationship of confidence with people as co-producer
of public value. Change cannot proceed merely by laws but requires new professional
skills and behaviors of public employees to ensure coherent processes and available
outcomes (Dente & Lo Schiavo, 1999). Change occurs as new organizational behaviors
experienced by people are introduced and implemented through explicit and tacit
tasks (Solari, 2007). Education and professional socialization tend to exert influence on
levels of public service motivation of employees feeling to contribute to the public goal
(Moynihan & Pandey, 2007). Competencies and expertise of personnel help to improve
the responsiveness of public administration being positively related to citizen’s
satisfaction with public services quality. Citizens are likely to perceive public
administration as more responsive and sensitive to their demands when to believe that
public policy is implemented coherently with clear ethical standards. These findings
stimulate to better design and improve training systems for public administrators
(Vigoda, 2000).
The quality of personnel in terms of competencies, motivation and commitment to
goals and mission of public organizations constitute a strategic resource in order to
develop and sustain a responsive public administration (Valotti, 2000). New public
administrators should be trained in principles of public administration that provide
the necessary foundation for growing administrative system (Moe & Gilmour, 1995).
New public managers should have a different style in terms of values, orientations and
attitudes, being able to formulate strategic goals and programs, identify citizen needs
and actively communicate, including politicians in the management process, advising
political decision makers and motivating their staff and employees. It should be
necessary to promote a network of new public management teachers through the
exchange of information about programs, their organization and success as the first
step for a common understanding about appropriate subjects areas (Reichard, 1998).
Sustainable management education relies on involving students, educators,
organization and societies willing to participate in interdisciplinary innovative and
external communications (Starik, Markus & Clark, 2010) following some principles
(Stachowicz-Stanusch, 2011): generation of sustainable value for business and society;
effective learning experience for responsible leadership; interacting in a partnership
with scientists, business and local government for meeting social and environmental
responsibilities and jointly facing these challenges; facilitating the debate and dialogue
among government, civil society, business, interest groups and other stakeholders
about the issues and questions regarding social responsibility and sustainability.
1084 Strategica 2016
Employee training and development should be part of a long-term learning strategy
including reflection about the expansion of organization knowledge systems (Haugh &
Talwar, 2010). Sustaining change relies on competencies, enforcing motivation and
commitment of personnel as a strategic resource for building more and more
responsive public organizations (Valotti, 2004; Quaglino & Rossi, 2007). Reinventing
government implies to design a professional path for education and training
programs and methods (Fontana, 1998) leading personnel to assume new tasks
learning new values and playing coherent behaviors and roles (Sinatra & De Martiis,
2004). Cultural, professional and social values tend to drive strategic and
organizational change with a learning process by sustaining civil service personnel
aware to actively contribute to increasing both motivation of personnel and
effectiveness of public service delivery (Rebora, 1988).
Different approaches for designing training and education initiatives tend to emerge
(Borgonovi, 2004): training as a strategy of change for services delivery: training and
education initiatives serve to share competencies, knowledge, skills and behaviors to
implement processes of innovation and improve the quality of service delivery.
Training as origin or stimulus for change helps to weaken old pattern of behavior
within public administrations where resistance to change is dominant and
organizational inertia are pervasive of behaviors and mindset. Training as a response
to specific needs and demands: by introducing new decrees or act, the disengagement
and compliant of citizens for the low quality of services lead to the development of
new knowledge, renewing competencies and skills of personnel. Changing and
increasing professional skills of public servant contribute to redesign work
organization. Training as a driver for diffusion of innovation and creativity sharing
and cultural orientation in order to stimulate and foster the creativity of people.
Conclusions
Public institutions serve the public interest as result of dialogue and respect for people.
Changing public organizations tend to rediscover the importance of public interest and
relevance of public service motivation of employees for driving change and sustaining
collaborative relationships with citizens. Public organizations should behave as
responsive institutions in order engage citizens relying on employees strongly
motivated and committed to public service. Sustaining public service motivation as a
source for building change within public organizations should contribute to restoring
public trust between citizens and public institutions often perceived as distant and far
from needs and demands of citizens and people not always satisfied about how public
services are offered and provided. Sustaining public service motivation within public
organizations serves for leading public sector reform to proceed beyond a merely
legalistic and mandatory compliance driven by laws and contribute to overcoming
bureaucratic culture and embed values coherently with ethical and responsible
behaviors of public servants by sustaining openness and transparency within the
administrative culture. Public organizations tend to create public value and build
transparent public administration by sustaining education and training of public
employees as a strategic source to drive change and improve the relationship between
public institutions and citizens. Public management reform leading to change requires
investments on human capital in order to improve professional competencies and
education of public employees. PSM can contribute to the cultural change of public
Towards Sustainable Public Organizations 1085
administration if continuously and effectively supported by commitment and
education of employees to public values and ethical principles. Training and education
may exert influence on ethics and behaviors of public servants as agents of change.
Training and education initiatives should be focused more and more on principles and
values coherently with the new public service rather than on merely management
techniques. Training and education programs can be planned and oriented to hybridize
the administrative culture by breaking bureaucratic logics for sustaining the cultural
change of norms, values, and behaviors.
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1088 Strategica 2016
NEW TECHNOLOGIES FOR RESTORING TRUST IN PUBLIC
ORGANIZATIONS
Mauro ROMANELLI
University of Naples Parthenope
13 via G. Parisi, 180132, Napoli, Italy
mauro.romanelli@uniparthenope.it
Abstract. Public organizations have to serve the public interest as responsive institutions
by embracing technologies of information and communication in order to connect with
citizens and sustain public trust improving openness, transparency, governmental
legitimacy and accountability to foster interaction between public institutions and
citizens in order to engender trust. New technologies drive modernization of public sector
leading public organizations to build a permanent culture of transparency and openness
encouraging citizens to interact and engage with the public administration more and
more transparency and information provision oriented.
Keywords: public interest; e-government; e-governance; trust; public organizations;
transparency.
Introduction. Towards a public administration re-discovering the public interest
The public institution has to build and restore the trust of citizens by improving the
quality of services and enhancing interaction and communication with the public. The
aim of this study is to elucidate how public organizations embracing technology tend
to sustain change by modernizing public administration, driving the transition from e-
government to e-governance, fostering transparency for accountability in order to
restore trust with citizens. The study relies on archival data drawn from the analysis
and review of the literature concerning the role of technologies in supporting public
administration to rediscover public interest and behave as a responsive and
transparent organization in front of the citizens. Public sector reforms tend to drive
strategic and organizational change within public administration leading public
organizations to build and maintain trust with citizens.
Since the 1990s, new public management doctrines emphasizing the performance
achievement seem not to adequately develop the paradigm of democratic
accountability in order to enhance the trust of the public in government performance
(Behn, 1998). Public institutions have to develop continuity and credibility of
organizational activities by gaining legitimacy and maintaining the organizational
reputation in front of their stakeholders (Suchmann, 1995; Krause, Moynihan &
Carpenter, 2012) by embracing technology in order to better deliver services and
improve interaction with citizens (West, 2004; Dawes, 2008; Bannister & Connolly,
2012).
New technologies driving modernization of public administration contribute to
sustaining change and promote trust by emphasizing transparency by leading the
transition from e-government 1.0 only technology-driven to transformational
Towards Sustainable Public Organizations 1089
government 2.0 enabled by ICT incorporating knowledge on the use of ICTs and
relationships (Lips, 2012). Public organizations are moving from responsiveness to
collaboration with citizens as partners that legitimize government by voice, support,
and satisfaction, being accountable and transparent in public sector operations to be
continuously monitored for providing better economic performance (Vigoda, 2002).
Public organizations tend to follow the public interest producing benefits and outcome
for citizens and stakeholders by building and maintaining trust relying on agency
officials adhering persistently to it (Thomas, 2008). New governance processes require
public organizations to build partnership with citizens and other stakeholders for
work of government by helping citizens to meet their shared interests rather than
steering society in order to make a meaningful contribution to society and community
(Bingham, Nabatchi & O’Leary, 2005; Denhardt & Denhardt, 2003; Denhardt &
Denhardt, 2000).
The role of technology in sustaining public trust in government
The main activity and role of public administration should consist of building public
trust in government for making a democracy possible (Goodsell, 2006). Trust is
essential and central to democracy because of linking citizens to the institutions
representing them by enhancing the legitimacy and the effectiveness of government
sustained by democratic methods and approach. Trust seems to be generally oriented
to the future. Trust seems to be a vague and multidisciplinary concept. A clear
definition of what trust seems to be lacking or not properly clear in the literature.
Trust concerns some expectations that one person or actor will hold about how one
person or institution will perform on some future occasion. Institutional trust is
related to the extent of which people are confident that public institutions will able to
perform satisfactorily their tasks. Institutions well performing tend to generate trust.
On the contrary, untrustworthy institutions tend to communicate and produce distrust
and disaffection. Trust and distrust tend to be rational responses to the performances
of institutions. Trust in government is determined by the level of public satisfaction
and public expectation of government performance.
The decline of public trust undermines the legitimacy of representative government.
Information technology seems to offer a useful opportunity to enhance public trust and
citizen satisfaction improving transparency, effectiveness and policy participation
(Moon, 2003). The increasing perceived decline in trust relies on the incapacity of
government to provide citizens with the public services they really need. Public
organizations have to revitalize their image coping with a growing disengagement of
citizens and paying attention to causes of the decline of public trust in order to
communicate with citizens and restore public trust sustaining openness, improving
transparency and enhancing accountability. Recent trends in public sector reform
seem to lead to trust-based steering and collaboration (Van de Walle, 2010).
Trust implies a risk about the expectation of gain or loss determining whether the trust
will be or not. Trust is always conditional and contextual relying on expectations,
choice or uncertainty (Coleman, 1990). Trust can be produced, maintained and
restored (Thomas, 1998). ICT-based public services contribute to enhancing and
restore trust (Welch, Hinnat & Moon, 2005). ICTs contribute to empowering social and
political interaction between public institutions and citizens driving government
1090 Strategica 2016
processes relying on collaboration and cooperation. The Internet and the technologies
help governments to restore public trust by coping with corruption, inefficiency, and
ineffectiveness of services (Moon, 2003). Interactivity and transparency seem to be
associated with citizen trust in government. Citizens expect that e-government should
attend to issues of transparency and interactivity to engender citizens’ trust and
acceptance of democratic and public institutions (Welch, Hinnant & Moon, 2005). E-
government serves as means for enhancing trust by empowering citizens and
sustaining governmental accountability (La Porte, Demchak & Jong, 2002). E-
government as a way to increase process-based trust by improving interactions with
citizens and perception of responsiveness (Tolbert & Mossberger, 2006) is not able to
induce per se trust for an unresponsive and distrusted government (Parent, Vandebeek
& Gemino, 2005). Building trust in government relies on providing services that
benefit the citizens or shift imbalance of power towards citizens (Smith, 2010). A
mature government technology-driven should strengthen the role of citizen as an
active user of governmental services and refer to digitalization of core activities
following a perspective more focused on beneficial for the end-users and citizen-
centered (Andersen & Henriksen, 2006; Layne & Lee, 2001).
Sustaining transparency and accountability for building trust between public
institutions and citizens
Transparency as part of public sector reform is seen by policy makers as a panacea for
fighting the increasing mistrust of citizens for government and enabling good
governance holding elected and appointed officials accountable for their actions.
Enhancing transparency allows citizens to monitor and participates in policy processes
by increasing government accountability and putting pressure on government
performance. With regard to public sector transparency can be defined as the
availability of information about public administration to permit to citizens to oversee
the internal workings or performance of public servants and officials in terms of:
institutional relationship between two actors in which one actor can monitor the other
one; information exchange about the internal workings or performance of an actor are
visible; transparency of workings (in terms of inputs, outputs and outcomes achieved)
and performance (how these results are achieved) (Meijer, 2013). Transparency can
contribute to strengthening public confidence by enhancing the social legitimacy of
public institutions (Curtin & Meijer, 2006). Informing citizens leads to improve policies
and enhance governmental legitimacy (Meijer & Thaens, 2003). Transparency and
provision of information contribute to transfer governance to the community by
information (Bannister & Connolly, 2012). People frequently having contact with
government or perceiving government as closed institution tend to demand more
transparency and open government. While a not enough access to government is a
driver for demand for transparency, a high level of confidence of citizens in their
officials is likely to produce less interest in transparency (Piotrowsky & Van Ryzin,
2007). Transparency should contribute to promoting and increase government
accountability by providing information as a strategic asset for citizens about what
governments are doing (McDermott, 2010). Transparency tends to be a goal itself
despite effective issues emerging as rhetoric means for mobilizing resources, people,
and organizations (Curtin & Meijer, 2006). Governments adopting laws for access to
information and embracing technology for providing online service and
communicating with businesses and citizens tend to foster information flow for
Towards Sustainable Public Organizations 1091
increasing the chances of economic investment and development in a nation even if
there are no advances in the perception of government transparency (Relly &
Sabharwal, 2009).
National culture values may play a significant role in how citizens perceive and
appreciate government transparency. Thereby, transparency may do little in order to
improve the opinion of citizens on the government in the short term at least
(Grimmelikhuijsen, Porumbescu, Hong & Im, 2013). Transparency leading to more
knowledge about government agencies as the highly informative source could help
government agencies to increase citizen trust. Transparency does not automatically
lead to high level of trust. Only providing a high level of transparency helps citizen to
have trust in government. Democratic institutions have to behave as transparent
organizations to function for building and maintaining the trust of citizens in
government institutions (Grimmelikhuijsen, 2009). Public organizations tend to
behave as transparent but not always as accountable and responsible institutions in
front of their stakeholders. Transparency does not automatically lead to accountability.
While transparency implies dissemination and access to available information, the
accountability requires the capacity to produce answers in terms of sanctions,
compensation or remediation. Thereby, transparency and accountability can be
conceived along a continuum in which the institutional answerability is the area of
overlap whereas a clear transparency, which refers to information access policies and
leads to reliable information on institutional performance, is able to lead to a soft
accountability (Fox, 2007).
Managing information and technology for driving change
New technologies offer opportunities for access to government information and
contribute to improving efficiency and effectiveness of public organizations reshaping
public administration in the last decade. Managing strategically information in the
public sector implies to choose coherent information technologies that help reinforce
and redefine government services for maintaining relationships with critical
stakeholders (Andersen, Belardo & Dawes, 1994). Governments are increasingly
embracing the technologies of information and communication (ICTs) in the attempt to
modernize public management systems, the communication with citizens, businesses,
and other stakeholders by driving a double change (Bellamy & Taylor, 1994): the role
of consumer is changing from being a mere recipient to becoming a proactive choice
maker; from automatization as mere substitution of human labor by machine to
information perspective based on development and management of information that
implies that data collected are integrated and shared to become significant resources
for wide application. ICTs contribute to improving the information management as a
means for public organizations and redesign the work processes overcoming the
traditional bureaucracy and driving the drift paradigm towards an infocracy by
enabling the informational architecture (Zuurmond, 2005). The adoption of technology
seems to progressively lead to e-government organizations and agencies building
knowledge and sustaining learning for improving the productivity and maximizing the
performances (Fang, 2000). ICTs contribute to creating a rational organization of
public administration solidifying political relationships by stabilizing the informational
architecture, rationalizing public policy and transforming both legal processes into
administrative-technical processes and citizenship into consumership (Zouridis &
1092 Strategica 2016
Thaens, 2003). ICTs contribute to enhancing a public value perspective coherently
with public sector reforms managing the complex relationship between citizens and
public organizations (Cordella & Bonina, 2012). New technologies contribute to re-
address reform processes driven by new public management doctrines (Npm) towards
a digital era governance coherently with reintegration in terms of reinstating central
processes and re-engineering back-office functions; reorganization based on clients’
needs, interactive and information-seeking, agile government processes; digitization
processes in terms of disintermediation, zero touch technologies, moving toward open
government, facilitating co-production and isocratic administration coherently with a
community/citizen-centered approach where citizens tend to interact with
government agencies (Dunleavy, Margetts, Bastow & Tinkler, 2005). ICTs contribute to
enforcing democratic public values as impartiality, equity, honesty and fairness of
government for engendering and sustaining initiatives coherently with public sector
reform agenda towards a greater responsiveness (Cordella & Bonina, 2012; Cordella,
2007).
From e-government to e-governance
ICTs contribute to developing new policy proposals mobilizing the support of citizens,
help for the steering of government and support to strategic processes by connecting
elected representatives with citizens for deliberating and generating new ideas
(Zouridis & Thaens, 2003). ICTs contribute to enhancing democratic processes
providing a dynamic environment for ongoing learning and action (Dawes, 2008)
leading to new forms of governmental legitimacy and spaces of governance (Navarra &
Cornford, 2012). The adoption of technology in the public sector is a useful means for
innovation in government and opportunity for democratizing public life and the
relationship between public organizations, citizens, and their stakeholders. Technology
in public administration refers to the concepts of e-government and e-governance as
issues of public management reform agenda and cultural change.
E-government refers to the use of information technology to enable and improve the
efficiency with which government services are provided to citizens, employees,
businesses, and agencies. E-government contributes to enhancing the responsiveness
of public administration (West, 2004) even if some barriers tend to obstacle the slow
advancements of e-government: lack of technology and web staff or expertise, lack of
financial resources, lack of support from elected representatives (Norris & Moon,
2005). While e-government tends to sustain a life more convenient for consumers with
regard to an administrative plan, e-governance is focused on a politics plane in which
the role of citizens is sanctioned (Calista & Melitski, 2007). E-governance implies an
interactive and dynamic communication between government and citizens driving the
government to interact democratically with citizens by increasingly promoting a
meaningful citizen engagement looking at the democratic potential of information and
communication technologies in terms of manageability and sustainability
(Panagiotopoulos et al., 2012). E-governance is related to the use of ICTs in
government for driving government to build collaboration networks and foster citizen
participation (Qian, 2010) in order to alter governance structures or processes, create
new governance structures or processes the about the ‘how’ of government in terms of
power exercised and policy created enforcing values as transparency, accountability,
integrity, efficiency (Bannister & Connolly, 2012).
Towards Sustainable Public Organizations 1093
Promoting transparency for accountability
ICTs should contribute to increasing transparency and empower citizens to monitor
government performance. The Internet plays a key role as an enabler of transparency
(Curtin & Mejier, 2006). Building a transformational government enabled by
technologies of information and communication implies to support an open and
transparent government (Lips, 2012). With regard to transparency, the impact of ICT
seems to be both positive and transformational (Bannister & Connolly, 2012) even if
transparency enabled by technology takes the risk to damage the reputation of
government (Bannister & Connolly, 2011). Information technology pressures leading
to increased public accountability contribute to promoting a citizen-centered
transparency to improve citizen engagement and involvement (Jaeger & Bertot, 2010).
The Internet contributes to making public organizations as open and responsive
institutions willing to serve the interest of citizens (La Porte, Demchak & Jong, 2002).
ICTs should contribute to creating a permanent culture of transparency and permit to
public organizations to improve the knowledge and information about decision-
making by building an accountable relationship with citizens (Meijer, 2013). Social
media lead government to promote transparency by improving access to public
information and offering multiple, dynamic interactive channels; addressing specific
citizen interests; ‘meeting’ populations who might not otherwise encounter the
government information; releasing sensitive information; better informing the public;
monitoring government corruption (Jaeger, Bertot & Grimes, 2012).
Thereby, technology can help but also offers some problematic points. Technology is a
necessary means but not sufficient resource to build a strong government-technology
driven (Qian, 2011). Technology does not seem to lead to substantial changes in the
style of the relationship between government and citizen reinforcing the existing
structures (Pina, Torres & Royo, 2010). In a networked society, the role of ICTs is to
support public accountability driving the transition from e-government to e-
governance for building horizontal accountability involving not only public agencies
but also different actors (Meijer & Bovens, 2003). Thereby, transparency technology-
driven does not always lead to real and effective accountability enhancement helping
the agencies to use new governance interface with citizens as a political channel for
promoting their vision (Wong & Welch, 2004). Government organizations that have
not yet recognized the power of social media and networking to engage with the public
should move towards an open information paradigm to sustain transparency and
follow behavioral changes online adopting coherent off-line behaviors (Mergel, 2012).
Conclusions
Public organizations coping with a growing disengagement of citizens have to face the
decline of public trust embracing technology for enhancing transparency and
promoting accountability in order to build new governance structure citizen-oriented
in the public sector. Technologies seem to lead governments to behave as transparent
and open institutions and drive public institutions to interact with citizens providing
data and information, developing public communication and trust with citizens. It is
necessary to sustain the transition from e-government to e-governance perspective
moving towards the understanding of needs and demands of citizens enhancing
communication and strengthening information provision for dialogue and
1094 Strategica 2016
transparency of government information than merely providing e-services.
Technology alone cannot indicate the one best way to solve all the problems about
rebuilding relationships trust-based and the reconnection of citizens with public
institutions as organizations. Public organizations focusing only on technological and
technical aspects tend to promote transparency in order to provide efficient e-services
as responsive institutions seeking legitimacy in front of distrusted citizens. Public
organizations embracing and shaping technology in order to connect effectively with
citizens should behave as open institutions enhancing transparency and sustaining
accountable relationships with citizens to restore trust with people. The study is
descriptive and only exploratory. New technologies drive modernization of public
sector leading public organizations to build a permanent culture of transparency and
openness encouraging citizens to interact and engage with the public administration
more and more oriented to transparency and information provision. Future research
perspectives imply to investigate further the relationship between technology, public
organizations, and citizens towards a digital and smart public ecosystem to improve
the wealth of communities and society.
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1098 Strategica 2016
UNDERSTANDING GOVERNANCE OF PARLIAMENTARY
ADMINISTRATIONS
Mauro ROMANELLI
University of Naples Parthenope
13 via G. Parisi, 180132, Napoli, Italy
mauro.romanelli@uniparthenope.it
Abstract. Mechanisms of governance within parliamentary administrations rely on the
role of the Secretary-General as a trait of the union between the political sphere and
administrative sphere. The role of parliamentary staff is to permit to the representative
assembly or legislature to perform constitutional duties without being dependent upon
information source of the executive power. Mechanisms of governance following the
historical, strategic and organizational evolution of parliament as an organization tend
to develop reshaping and redesigning the relationship between politicians and
administrators along with a continuum ranging from separation of overlapping and
complementary roles. The managerial and strategic role of the Secretary-General is
increasing in relation to high operational and organizational complexity of
parliamentary staff leading the relationship politics-administration towards a
continuous search of dialogue and partnership.
Keywords: politicians-administrators; mechanisms of governance; parliamentary staff;
secretary-general.
Introduction
The aim of this paper is to elucidate that mechanism of governance within
parliamentary administration following the historical, strategic and organizational
evolution of parliament as an organization tends to develop reshaping and redesigning
the relationship between politicians and administrators. The use of parliamentary
staffs permits to the legislative branch to counterbalance a perceived advantage within
executive branch agencies (Hammond, 1984). Mechanisms of governance rely on
building and maintaining the relationship between political and administrative
spheres: the Office of Speaker or Bureau and the Secretary General as top
administrator of support staff. The relationship between politicians and administrators
may be conceived as complementary: politicians may freely make decisions but cannot
deny the advisory role and policy-advising activity of the administration (Svara, 2006;
Svara, 2001). Governance of parliamentary administration relies on the role of the
Secretary-General as a trait of the union between the political sphere and
administrative sphere in order to ensure legislature, parliamentary or representative
institution and assembly to perform their duties and operate without being dependent
upon information source of the executive authority.
Towards Sustainable Public Organizations 1099
Politicians and Administrators: from separate to complementary roles
Traditionally, the relationship between politics and administration was based on
separation of roles (dichotomy) between politicians providing guidance and
administrators as bureaucrats, professionals and mere executors of political mandates
responsible for making their neutral competence available to the policy process and
translating value choices into concrete results (Wilson, 1887; Weber, 1922). Peters
(1987) deduced five ideal-typical modes of interaction on a continuum of strict, formal,
separation and hierarchy, in which political leaders prevail over neutral bureaucrats,
to the administrative-state model, in which technical expertise, bureaucratic activism,
and command of information allow bureaucratic professionals to dominate the policy
process. Thereby, Putnam, Rockman and Ackerman (1981) have identified four
images: simple and clear distinction between politicians as policy-maker and
bureaucrats in charge to merely implement policies; both politicians and
administrators participate in making policy providing distinctive contributions;
bureaucrats may play a political role because they engage in policymaking and are
concerned with politics; a pure hybrid without any distinction between the roles of
politicians and bureaucrats. The distinction between politics and administration can be
viewed as a continuum ranging from a total and clear separation to a situation where
there is no distinction between the two spheres (Jacobsen, 2006). Politicians and
administrators are interdependent because they operate together in the common
pursuit of sound governance and contribute to public activities and interests based on
their distinctive perspectives, competencies, and roles. Within structure and
framework of public organizations central administrators may be more tightly linked
to politicians and political processes; politicians at the top level will act more actively
into administrative matters so that the overlap between the two spheres can occur
(Jacobsen, 2006). The total relationship between politicians and administrators can be
conceived as complementary which tends to imply distinctness but the emphasis on
how each contributes to the whole: politicians may freely make decisions but cannot
deny the advisory role and policy-advising activity of the administration (Svara, 2008).
The administration may influence and interpret the decisions and the intention of the
legislature, exercising an independent judgment in executing policy. Politicians may
respect administrative process in abstract but reserve final decisions to themselves
and seek to redirect the administrative decisions (Svara, 1998). The boundaries
between the political and the managerial spheres tend to be considered as more
blurred than separated and the two roles appear to be complementary and
overlapping with their features depending on contextual, organizational and individual
factors (Svara, 2001; Jacobsen, 2006). Elected officials and administrators maintain
distinct but overlapping roles in policy and administration (Svara, 2006a) based on
their unique perspectives and values and the differences in their formal positions.
Elected officials tend to dominate mission formulation although the administrators
may play an advisory role in developing proposals and analyzing conditions and trends
(Svara, 1985).
Complementarity recognizes and stresses the interdependence and reciprocal
influence between elected officials and administrators along with distinct roles;
compliance with independence; respect for political control along with a commitment
to shaping and implement policy in ways that promote the public interest (Svara,
2001). The relationship between politicians and administrators could be seen as the
interaction between different degrees political control of elected officials and
1100 Strategica 2016
professional independence (high/low) of administrators (Svara, 2001). The zone of
complementarity implies both high-middle levels of political control and professional
independence of administrators. Complementarity tends to reconcile conflicting
aspects: how politicians maintain control and allow administrators to maintain
independence and adhere to professional values and standards to be responsible to the
public. The combination of low control and low professional independence is
producing behaviors related to ‘live and let live’, while a high level of control
associated with low professional independence leads to administrators not committed
to public interest acting without respect for politicians. Political dominance relying on
the high degree of control of politicians opens up to potential for political corruption
(Svara, 2001).
Models of Parliament and models of Parliamentary Administration. The role of
parliamentary staff
The staff has been conceived as a deliberate organization for thought rather than
execution, purely advisory but necessary in a large and complex organization to serve
the line (Golembiewski, 1961). It is difficult to imagine even the most basic of
legislative bodies operating effectively without being aided by a support staff
administration. Parliamentary staff may represent a thread of continuity, institutional
memory, and expertise within the institution. Legislatures have expanded their staff
levels and the expertise on staff to cope with increasing complexity of governing
(Romzek & Utter, 1997). The expansion of legislative staffs has been justified as a way
of enabling politicians to counterbalance the growing influence of the executive.
Parliament needs a technical staff able to keep it informed. Parliamentary staffs do
most of the preliminary legislative research and help generate policy ideas providing
support to the Parliament outside the operating workflow and do not directly exert
influence on the workload (Bontadini, 1983). When Members of Parliament are aware
of their state of inferiority in front of the executive authority are likely to demand
technical and specialized assistance on lawmaking (Campbell & Laporte, 1981). The
role of parliamentary staff is to permit to the representative assembly or legislature to
perform constitutional duties without being dependent upon information source of the
executive power. While executive branch agencies are considered as the operating core
of governmental administration (Pinto, 1983), the parliamentary staff is responsible
for providing non-partisan assistance and professional aide on lawmaking and
policymaking without being dependent on the executive branch agencies (Finzi, 1934;
Tocanne, 1993; Zuddas, 2004). Parliaments have developed staff structures shaped
according to their own historical traditions. Staff structure also reflects the strategic
role of the legislature in the political system (Campbell & Laporte, 1981; Ryle, 1981;
Blischke, 1981). Parliament may play over time a decisional/ratifying behavior
designing a staff structure consistently with a strategic choice. Mixed models of
parliament and administration may emerge over time. Ratifying Parliament does not
play an active role in policymaking. It is supported by a registration staff able to
perform only an administrative task (convocation and registration of sittings,
transcript of debates). Decisional Parliament may play a competitive role with the
executive power on policymaking. It is supported by a consulting staff able to provide
professional support and aide on lawmaking and policymaking (Chimenti, 1981).
During centrist governments (the 1950s) Italian Parliament played a ratifying role. In
1970s Italian Parliament could be qualified as a ‘governing parliament’ playing a
Towards Sustainable Public Organizations 1101
strategic behavior and decisional role in the political life (parliamentary centrality).
Since Parliament (the 1970s) adopted more effective inquiry and control powers the
impact of innovation on the structure of administrative and legislative staff occurred as
Parliament changed political role and strategic choices (Pinto, 1983; Cheli, 1987).
Mechanisms of governance. The role of the Secretary-General
Governance of parliamentary administration necessarily implies dialogue and
cooperation between political governing bodies and administrators. Mechanisms of
governance should ensure parliamentarians as operating core to work without being
dependent upon information source of the executive power. Members of Parliament, as
representatives, legislators, and scrutinizers of the government, tend to select by-
election the members of Bureau or Office of Speaker as the strategic apex of
parliamentary institution. The Office of Speaker or Bureau is considered to be as a
political and governing collegiate body (Gnan, Hinna, & Tomasi, 2008). Bureau as the
collective governing body may decide on the procedural propriety of draft bills,
appoint the SG and other officials senior, organize parliamentary business, arrange the
organization and running of service and staff in accordance with the procedure and
decide the rules relating to the accounts of the Assembly, organize cooperation
between Parliament and outside bodies. Bureau generally may comprise the Speaker
or President of the assembly, The Vice-Presidents, The Questeurs, the Secretaries. The
Speaker is in charge to organize parliamentary business, control debates in public
sittings, decide the order of amendments, ensure that procedure is followed, direct and
monitor the operation of parliamentary services, sign administrative decisions. The
questions are responsible for the administrative organization (staff, equipment,
buildings), finance (proper accounting, expenditure, procurement). The Secretaries
may assist the President at sittings on voting, read documents, roll-calls, verify the
minutes of each sitting.
Most of Parliaments are organized with one Secretary-General for each Chamber as the
managerial apex of parliamentary administration accountable to the political
governing body (strategic apex) (AA. VV., 2003; Courdec, 1998; Tocanne, 1993;
Zampetti, 2000). The Secretary-General as the top manager of administrative and
legislative support staff is accountable to the political governing body (Bureau) playing
as necessary interface and boundary spanning role between support staff work units
and Members of Parliament (Ciaurro, 1983; Tocanne, 1993; Zampetti, 2000). The SG is
the highest official senior within the management of parliamentary administration in
vis-à-vis the political collegiate governing bodies (strategic apex). The SG is a full-time
servant of parliament being unable to take up other posts in conflict with institutional
duties. The SG is the main benchmark figure for providing legal and procedural advice
to the President/Speaker and is accountable for the efficient working operation of the
administrative apparatus. The SG may play a dynamic role operating both as the head
of hierarchical structure and liaison guaranteeing that structures work together in
order to ensure that all issues are dealt with on the necessary across-the-board basis
due to the complexity of the administrative activities. The SG does not cease from office
when a new parliament is elected or when the House is dissolved early, and it is not
necessary to be reconfirmed in office. The candidate for SG’s job must be highly
competent, with managerial skills, specific professional capabilities, not only in public
administration but above all in parliamentary and institutional affairs and matters. In
1102 Strategica 2016
this connection, specialist knowledge of the parliamentary law is often required as
desirable.
The SG may perform a dual role. SG is the principal adviser on law, practice, and
parliamentary procedures. The SG as top manager may direct legislative and
administrative services and ensure the efficient functioning of the parliamentary
administration, usually entailing broad management responsibilities for parliamentary
staff, budgets, and assets (AA.VV., 2003; Zampetti, 2000). Hourglass configuration or
form is the term used to describe the mechanism of governance emerging within the
organizational development of Italian parliamentary administration. Bureau is the
political apex of the parliamentary organization. The Secretary-General (SG) acting as a
nexus between support staff work units and parliamentarians is the trait d’union
between the political sphere and administrative sphere (Bontadini, 1983; Cheli 1983;
Chimenti, 1981; Ciaurro 1983; Pacelli 1984). The Secretary-General as the effective
fulcrum of legislative and administrative staff is responsible for setting policies,
scrutinizing and monitoring the work of the Administration, with an overall unifying
function by identifying objectives and programs for the workload, laying down
directives for their attainment, assessing the results and playing an active part in the
main functional processes (Posteraro, 2009).
Historical evolution of governance and organization in the Italian parliamentary
administrations: the changing role of the Secretary-General
Mechanisms of governance tend to follow both historical-political and strategic-
organizational evolution of parliamentary administration. Support staff work units
increasingly evolve over time in terms of operational complexity. The task of the
Secretary-General evolves from advisory to managerial roles. The responsibilities of a
political body (Bureau) move from managerial to strategic tasks. Support staffs move
from registration to consulting administration. Functions, tasks, and activities tend to
change over time: from data acquisition and processing to research, study and
documentation activities.
Historically, the organizational evolution of the support staff tends to follow the
political evolution of the parliamentary system (Cheli, 1983; Chimenti, 1994; Chimenti,
1981; Ciaurro, 1983; Pinto, 1983). Originally, the task of parliamentary staff consisted
of maintaining the physical facilities required by Parliament, accounting for its
expenditures, ad providing transcripts of its debates (Chimenti, 1981; Ciaurro, 1983).
Increases in legislative workload and constituent demands have been responsible for
the growing reliance on staff coherently with increasing complexity of activities on
policymaking and lawmaking over time (Ryle, 1981). There has been an increase in the
scope of the other traditional staff activities as well as a general modernization of
administrative methods (Campbell & Laporte, 1981).
With Parliament becoming the centre of political competition (parliamentary
centrality) (1971) and the introducing of new instruments of investigation, inquiry,
and control over the executive (Pinto, 1983) strategic and operational complexity of
parliamentary staff increased in terms of number of personnel, professionalism of
human resources, differentiation and specialization of tasks, work units (Garella &
D’Orta, 1997; Cheli, 1983; Pinto, 1983; Tocanne, 1993). Modern legislators must
Towards Sustainable Public Organizations 1103
depend on expert sources of information and advice. Parliamentary administrations
have increased their informative and legislative sources by developing activities of
study research and information process (1948-1977). The professional evolution of
the administration is consistent with support staff able to provide both legal advice
and data, information and knowledge for aware decision-making of parliamentarians
(Ciaurro, 1983). The diversity of expertise is an important feature. Technical and
scientific staff, program and business analysts can bring added informational and
analytical expertise to parliament (Fox & Hammond, 1977). In 1980s sources of
information and knowledge, data and information process and acquisition tend to
improve leading to consider the organizational and managerial dimensions as critical
variables (Tivelli, 1992). Investigative functions have been enhanced through the
horizontal coordination and functional integration of powers and information
distributed across the services and offices as ordinary method to perform tasks and
ensure organizational flexibility, in order to adjust the structures to the specific task of
each sector and to the changing remits on a case-by-case basis (AA.VV., 2003; Zuddas,
2004).
The Secretary General was appointed as responsible for functioning of legislative
services at Chambers of Deputies in 1907. The task of the Secretary-General was
focused on legal and procedural advice. Thereby, the Secretary-General as vested of a
coordinating role and primus inter pares between the official seniors was becoming the
first and direct advisor and accountable official of the Speaker of Chamber in law and
parliamentary procedures. The Speaker is at the top of parliamentary services and
responsible for the proposal for appointment of the Secretary-General to Council of
Presidency (Bureau). Council of Presidency is responsible on the matter of personnel.
With the advent of the Fascist regiment (1922-1943), Parliament has become ratifying
and executive assembly of registration without any influence on lawmaking and
policymaking. Political apex (Speaker and Bureau) has enhanced its power and
responsibility. Political body is responsible for the appointment, hiring, promotions,
careers and dismissing of personnel without SG may make any proposal (Pacelli,
1984). Since 25 June 1946 support staff work units were dependent on the Secretary-
General who was responsible in front of the Speaker as responsible on the whole
personnel. Since 1953 the Council of Directors as an administrative body could direct
services being responsible on careers of low hierarchical level personnel. The Office of
Speaker was in charge to appoint both the SG and the officials of services, to structure
the organization design, to determine tasks and responsibilities of personnel. In the
1960s a new parliamentary majority of the centre-left coalition was leading to a
decisional parliament playing a proactive role in policymaking (parliamentary
centrality). Since 1964 the structure was moving in the transition from registration to
consulting and professional staff leading to an improvement of information and
knowledge sources and infrastructures (legislative, research and study service). In
1964 the Secretary-General was becoming the director of personnel at the top of the
parliamentary staff. Managerial responsibilities were added to advisory and
administrative tasks. The SG can stay at sittings of Office of Speaker with consultant
vote driving an enhanced autonomy of parliamentary administration (Pacelli, 2001). At
beginning of 1980s role and task of the Secretary-General evolved from purely
advisory and administrative to the strategic and managerial task. Since 1990s
managerial responsibilities of the Secretary-General increased in relation to the
operational complexity of structure. Today, the Secretary-General is being required to
be both an adviser on legal and procedural matters and top manager of the
1104 Strategica 2016
administration. The broadening of managerial powers enhances the advisory role
because of the increasing importance of the tasks connected with the scheduling and
planning of parliamentary business (Zampetti, 2000). With regard to the
administrative reform (1999-2001), the Vice-SGs are responsible both for coordinating
traditional sectors of activity and transversal functions relating to services closely
linked to the SG. Principles of organizational flexibility permit to the SG to create new
work units consistently with new policies without any or previous approval of the
political body.
The role of Secretary General within organizational evolution and complexity of
parliamentary administrations
The appointment of Secretary-General at the managerial and administrative apex is
associated with the rise of modern Italian parliamentary administration as support
staff structure autonomous and independent of Parliament as political organization
and institution. The distinction between political and administrative spheres was
considered a key principle for functioning and effectiveness of parliamentary
administration as public administration. The re-organization design of support staff
administrations is strictly related and dependent on managerial development within
the structure and demands organizational and management skills on the part of the SG
in relation to increasing evolution of task of work units and departments (Zampetti,
2000). As the organizational complexity is increasing strategic and organizational
changes rely on bridging politics and administration (Gnan, Hinna & Tomasi, 2008).
Complementarity tends to reconcile the need for politicians to maintain high control
and allow administrators to maintain high independence and adhere to professional
values and standards to be responsible to the public (Svara, 2001). Historical and
organizational developments of Italian parliamentary administrations lead to design
mechanisms of governance based on complementary roles that always more and more
emphasize strategic task of the Secretary-General in relation to high degree of
organizational complexity of parliamentary administrations relying on decisional
parliament supported by a consulting administration The Secretary-General is able to
play a coordinating or strategic role coherently with the development of a registration
or consulting administration providing support to a decisional parliament. The
Secretary-General is able to play a management or professional role coherently with
the development of a consulting or registration administration providing support to a
ratifying parliament. The relationship between politicians and administrators tends to
evolve coherently with different degrees of organizational complexity of parliamentary
administration.
Conclusion
Innovation processes lead to the redesign of the relationship between politicians and
administrators as grounded on dialogue, relying on cooperation and shared
partnership (Gnan, Hinna & Scarozza, 2009; Hinna, 2009), based on complementary
roles. In relation to increasing organizational complexity, strategic and organizational
changes require mechanisms of governance bridging politics and administration that
emphasize the dynamic, conflict-oriented and dialectical interactions between Bureau
and the Secretary-General as so to elucidate the multidimensional characters of the
Towards Sustainable Public Organizations 1105
relationship between politicians and administrators as suggested by the logic of
disharmony (Hansen & Ejersbo, 2002).
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Towards Sustainable Public Organizations 1107
PUBLIC PROCUREMENT SYSTEM PERFORMANCE INDICATORS. CASE
STUDY OF ROMANIA
Mirela Violeta PĂTRAȘ
Bucharest University of Economic Studies
6 Piața Romană, 010374, Bucharest, Romania
mirela_mialtu@yahoo.com
Abstract. The performance of the public procurement system must refer to the outcome
of the contract, it should not be limited to the outcome of the procedure. The article
identifies the performance indicators of the public procurement system in Romania,
reported by the regulatory and corrective institutions. Through the qualitative analysis of
these institutions reports, it was observed an improvement in public procurement system
performance evaluation, but there it remained room for better. The article complements
the literature by proposing a new set of indicators for assessing the performance of the
public procurement system in order to improve it, particularly by taking into
consideration the implementation phase of the awarded contract. A more performant
public procurement process involves a proper functioning of controls, the system of
remedies and redress, the system of prevention of conflict of interest and corruption.
Keywords: public procurement; indicators; performance; efficiency; contract
implementation.
Introduction
A generic definition of the public procurement is the permanent or temporary
acquisition by a legal entity, defined as the contracting authority of goods, works or
services by awarding a public contract (Asapro & Centras, 2014).
The importance of the public procurement system in developing countries is
recognized at the international level. According to the World Bank Group (2016), the
public procurement is a critical element of the government and it plays an important
role in the poverty eradication and the development of the country. Meanwhile, in a
public institution, because of the multitude of processes that are carried out and
default the related risks attached, the public procurement activities are the most
vulnerable to the corruption (Ministry of Public Finance, 2009). In the countries where
the government is able to control the corruption from public procurement system, the
human and financial resources are used efficiently, attracting more domestic and
foreign investment, on average having a faster development (World Bank Group,
2016).
A performant public procurement process involves a proper functioning of controls,
the system of remedies and redress, the system of prevention of conflict of interest and
corruption. Although the public procurement system in Romania is guided by
principles such as transparency, competitiveness and economic efficiency benefit of
society, the current organization of monitoring and supervision of the system needs
improvements and substantial changes. (Guvern, 2015). The monitoring of the public
procurement is done inefficiently, without creating a coherent picture of the public
1108 Strategica 2016
procurement market, it is focused on the activity and not on the performance. The
relevant performance indicators of public procurement system are not yet well
defined, not broadly accepted / agreed by stakeholders, and include interpretations
and different views (Government, 2015).
The term of performance refers to a particularly good result from a certain field. The
result of a public procurement procedure is the actual awarding of a contract
according to the principles specified by the GEO 34 / 2006 as amended and
supplemented (non-discrimination, equal treatment, mutual recognition, transparency,
proportionality, the effectiveness of public funds, accountability. The outcome of the
public contract award represents the completion of the assigned work as far as
possible in the initial terms and conditions (quality, duration, and value).
Consequently, we can say that the public procurement system performance does not
refer strictly to contract award, it could be attributed to the final result of the
acquisition, namely, the obtained good, the executed work, the service.
Figure 1. The final result of the public procurement procedure
Therefore, it is confirmed at the national level the necessity for an improved
monitoring tool of the Romania public procurement system, by defining and
implementing relevant performance indicators.
Literature review
The public contracts represent a signified quantum both from GDP and public
expenditure budget of any country. The imperative objective of the public
procurement system of a state is to ensure effectiveness and "value for money" in the
use of public funds. The performance evaluation seeks to answer the fundamental
question of whether the system of public procurement procedures and ensure the
provision according to the main objectives set (OECD, 2011). In the same time, the
evaluation should inform managers about what works well and should inspire to act
what aspect should be improved to provide the necessary information for correction if
something went wrong (Cărăușu, Pipă & Nimigean, 2015).
Through indicators, the benchmarking system is performed according to set criteria,
and the analysis of the problems causes or deviations from these criteria is made. The
main aim of the performance indicators is to improve the evaluated system. According
to OECD (2011), the measurement of the public procurement system performance can
be done at three levels: national (meta), the contracting authority (macro) and contract
management level (micro). Post-contract review of the public contract performance is
a comparison of the goods, works, materials and services related to the given criteria
specified and agreed. Performance measurement at micro level aims to verify whether
the acquisition has provided benefits for which it was originally conceived and identify
Towards Sustainable Public Organizations 1109
areas for improvement that can be applied when the future purchases will be made
(OECD, 2011).
In general, the public institutions in Romania, except the easily quantifiable area, there
are no performance assessment system, respectively no performance measurement
indices. Mardale (2015) considers that it is necessary to introduce a performance
measurement system in use of public funds by extensive use of clear, tangible and easy
to use ratios. This would be a first step of the performance concept towards migration
from doctrinal concept, intangible sphere to the real sphere, applied one
On the other hand, other countries, such as Thailand, in the practice of the larger
construction projects, the traditional evaluation of performance (time, cost and
quality) tends to be replaced by an more complex assessment considering new
indicators such as safety, efficiency resource efficiency, stakeholder satisfaction and
reducing conflicts (Ogunlana, 2010).
Deloitte (2011) conducted an analysis of performance indicators in public
procurement, specific to Romania, that are monitored at the EU level. These indicators
relate to the total expenditure on works, goods, and services, the value of calls for
tender published in the Official Journal (TED), the number of calls for tender published
in the Official Journal (TED). As a result of the report, an additional set of the
performance indicators were recommended to be analyzed and used by the
institutions involved, the new National Public Procurement Authority (NPPA) and
National Council for Solving Complaints (NCSC). The additional performance indicators
were classified into five categories: KPI related to the procurement procedures value,
KPIs related to the procurement procedures type, KPIs related to notices, KPI related
to the procurement procedures participants, KPIs related to the complaints.
Table 1 illustrates the performance indicators recommended by Deloitte to implement
in the Romanian institutions, together with the indicators used by the EC to describe
the procurement system at European level (EC, 2016) and indicators of EC comparing
the performance of public procurement system of the EU member states (EC, 2015).
Table 1. Public procurement system performance indicators
Indicators calculated by Indicators proposed by
KPI Categories
European Commission Deloitte
The estimated value of
tenders published in TED
(including utilities and
KPI relating defense)
to the The estimated value of
initiated tenders published in TED
procedure (excluding utilities and
value defense)
The total value of the
KPI relating procedures (in relation to
KPI relating to the The estimate of total general GDP)
to the completed government public The value of procedures,
procedure procedure procurement expenditure on allocated by type of contract
value value goods, services, and works (goods, services, works)
1110 Strategica 2016
The average value of
procedures, in accordance
with the type of contract
(goods, services, works)
The estimate of total general
government public
procurement expenditure (in
relation to GDP)
Number of contract notices
published in TED (excluding
utilities and defense)
Distribution of contract award
notices by size of notice for
works (excluding utilities
and defense),
Percentage of contract award
notices below 134 000 euros
with nonmissing
value (including utilities and
defense)
Percentage of contract award
notices below 134 000 euros
with nonmissing
value (excluding utilities and
defence)
Total number of contract
award notices published in
TED with nonmissing
value (including utilities and
defense)
Total number of contract
award notices published in
TED with nonmissing
Quantitative value (excluding utilities and
KPI defense)
Total number of notices
published in TED with
nonmissing
value (excluding utilities and
defense)
The total number of notices The number of notices on
published in TED, excluding the types of contracts
KPI related to the notices utilities and defense (goods, services, and works)
The value of each type of
procedure (open tender,
restricted tender, etc.)
The frequency of use for
each type of procedure by
KPI relating to the procedure type of contract (goods,
type No calls for bid services, works)
The average number of
bidders participating in
procurement procedures by
KPI relating to the bidders One bidder type of contracts awarded
Towards Sustainable Public Organizations 1111
(goods, services, works)
The average number of the
bidders participating in the
types of procedures
assigned (open tender,
restricted tender, etc.)
Aggregation
KPI relating to the award
criteria Award Criteria
KPI related to the duration of
the award Decision Speed
Reporting Quality
Publication rate in terms of
total expenditure and
excluding utilities and
defence
Publication rate in terms of %
of GDP (including utilities
and defense)
Publication rate in terms of %
KPI relating to the reporting of GDP (excluding utilities
quality and defense)
The number of procedures,
subject to the complaints
The total number of the
approved complaints of all
contested procedures
The total value of the
contested procedures
The total number of
procedures, canceled by the
contracting authorities
The number of the
procedures canceled after
the decision of the relevant
KPI relating to the complaints institutions
At European level, in the comparative study of Member States, the public procurement
system performance was measured according to the number of procedures which was
submitted, the number of procedure with a single bid, procedure which were
conducted without notice, procedure where the bids were submitted in common,
according to the criterion of awarding, the procedure duration and the quality of
reporting the information regarding the value of tenders (EC, 2015). According to the
report, Finland has the most powerful system of procurement and worst-performing
acquisition systems is used in Slovakia, followed by Croatia and Romania. The only
satisfactory indicators of Romania's performance PP system are the contract awarding
speed decision and the quality of information transmission regarding the amount of
the winning bid. In Romania, the legal provisions about the value information
transmission to al bidders are mandatory, therefore the latter indicator might not have
1112 Strategica 2016
as much relevance for Romania PP system performance. On the other hand, the short-
term decision of the contract award does not justify the changing of the legislative
rules fencing of the right of appeal, by imposing the guarantee of good conduct.
According to the 2015-2020 national strategy on public procurement, following the
appearance of the new body NPPA, the monitoring, and supervisory functions will
witness new dimensions of development. In the next period, to improve the
performance of the national public procurement system, in Romania will be monitored
some of the indicators proposed by Deloitte (2011), the total value of the public
procurement compared to GDP, competition in the procedures and the participation of
foreign operators, corruption index, the absorption of European funds and
administrative burden.
Methodology
Using the qualitative analysis of the reports of NCSC and NPPA from 2015 it was aimed
to identify the performance indicators of the public procurement system reported
from these institutions and the evolution way of the public procurement system
performance from 2011 until present. The information in the reports was selected
avoiding activity indicators, was pooled and compared the information of both
institutions, and after that, with the information from Deloitte report.
Results and conclusions
From the qualitative analysis of the latest reports issued by the NCSC and NPPA, I have
identified indicators reported by these institutions. In Table. 2 were synthesized only
performance indicators of the public procurement system, without taking into account
indicators based on activity.
Table 2. Reported performance indicators reported at NCSC and NPPA
KPI
KPI reported by NCSC KPI reported by NPPA
Categories
The total value of initiated / completed by
award / canceled procedure
The value of initiated procedures by type of
KPI relating to contract (goods, services, works)
the procedure The value of initiated procedures by type of
value funding
The number of EU/non-EU signers of awarded
Quantitative contracts, The number of awarded EU/non-EU
KPI contracts
The total number of initiated/completed
notices by publication
KPI related to The number of initiated notices by types of
the notices contracts (goods, services and works)
The average number of bidders participating
KPI relating to in procurement procedures by type of
the bidders contracts awarded (goods, services, works)
Towards Sustainable Public Organizations 1113
The average number of bidders participating
in the types of procedures assigned (open
tender, restricted tender, etc.)
The rejection rate by type of procedure
The rejection rate by type of contract
KPI related to The duration between the publication of the
the duration of contract notice and contract signing for each
the award type of procedure
The total value of
procedures in which
NCSC pronounced
decisions
The value of the
procedures in which
NCSC ordered
remediation/cancellation
The total value of EU
funded procedures, in
which the NCSC ordered
the annulment
The total number of
approved/disapproved The total number of the
complaints of the total approved/disapproved complaints of the total
number of procedures- number of procedures - subject of the
subject to complaints complaints
The total number of
complaints approved
deciding the The total number of the approved complaints,
remedial/cancellation where was decided the remedial/cancellation
KPI relating to procedure procedure, by type of the financing
the complaints The total number of
appeals annually filed
The number of the
appeals filed against the
documentation The number of the appeals lodged against the
assignment/outcome of documentation assignment/outcome of the
the procedure procedure
The number of the
appeals filed in
procedures funded by
state/local/European
budget
The number of the
appeals filed in
procedures by type of
contract
The ratio of the total
estimated value of the
procedure published in
PPES and the estimated
value of the contested
procedures
1114 Strategica 2016
The ratio of the total
estimated value of the
procedure published in
PPES and the estimated The estimated value of the procedures for
value of fixed/canceled which they were issued remedial/cancellation
procedures decisions
KPI relating to Percentage of the tender documentation
the tender published without rejecting/after 1
documentation rejection/after 2 rejections/after 3 rejections
The total number of finding and sanctioning
minutes
KPI relating to
the control The total amount of fines
NCSC decisions, contested to the Court of
KPI relating to Appeal
the NCSC NCSC pass/fail decisions rate
The share of procedures depending on the
degree of risk
The share of advertisements published over
48 days
The share of procedures whose value exceeds
10% EV
KPI relating to The share of procedures with a value <85% EV
the The share of contracts awarded in a single
irregularities tender
From Table 2, it can be seen that the evaluation of the public procurement system
performance has been partly improved. Just 5 of the 13 performance indicators
recommended by Deloitte (2011) has been implemented at the NCSC and NPPA level.
Some indicators are reported at the level of both NCSC and NPPA. This denotes a lack
of the efficiency in the work of these institutions. And the most important aspect is that
no institutions report any indicator for the contract implementation. Indicators like the
total value of the public procurement, the value of the procedures allocated on
different types of contracts (goods, services, works), the value of the procedures
allocated by type of funding provide relevant information on market size for public
procurement works, goods and services, and can also provide data on the amount or
proportion of works, goods and services in the overall volume of public procurement
transactions.
KPI relating to the procedure type are relevant in justifying risk analyses for control
and monitoring institutions causing, in addition, the type of procedure that should be
included explicitly in the control samples. KPI relating to the bidders (Share of joint
tenders) measures the opportunity to submit better offers because the aggregation
allows tendering better prices and exchange of know-how. The degree of utilization of
each award criterion is also an important performance indicator because it indicates
the Contracting Authorities emphasis to quality, execution time and maintenance costs.
Given that in a single public procurement procedure, may be submitted several
complaints, it may be more meaningful reporting the number of proceedings initiated
in SEAP when illustrates an evolution of the number of complaints submitted, fact
sustained by Mialţu and Patras (2014). A procedure with 2 bidders and 1 appeal is, in
the same way, non-performant as a procedure with 10 bidders and 5 appeals. Thus,
Towards Sustainable Public Organizations 1115
can be more relevant the indicators which refer to the number of procedures, subject
of the appeals, the total number of canceled procedures by contracting authorities, the
total number of canceled procedures by other institutions decisions
The indicators like the value for each type of used procedure (open tender, restricted
tender, etc.) and the frequency of use for each type of procedure by type of contract
(goods, services, works) are relevant in justifying the risk analyses for control and
monitoring institutions, causing extra type of procedure that should be included
explicitly in the control samples. As long as the final result of a correct public
procurement procedure is to achieve a work / providing a service as possible, in the
initial conditions (quality, term and value), with funding from the state budget /
Europe, we can talk about a public procurement system performance, if the duration or
value of awarded contract is exceeded, if the contract has not been fully realized, has
not achieved the required standards?
The situation in Romania projects, financed with EU funds, to be completed by the end
of 2015 and the completion of which could not be achieved by the deadline, there were
losses of millions of euros. The money, which must be financed from European funds
have been or will be paid from local funds due to exceeding the time limits, due to the
large number of the complaints, design errors, surveys, starting work without permits,
etc. Among such projects include modernization Park Camp Road, land of lakes
Floreasca and Tei, Square South Passage, Romanescu Park, Craiova Water Park, etc.)
Some projects have not even reached the stage of awarding the contract (photovoltaic
central, Slatina City Hall). I believe that in order to assess the performance or efficiency
of the procurement system must be taken into account indicators such as the number,
total amount, and percentage of the public contracts for works / services / supply
whose value / initial period has been exceeded, depending on the financing type. These
indicators provide relevant information on the effectiveness of public procurement
contracts.
Obviously, in this regard, it is useful the collaboration between the institutions, in
order to implement new KPIs to improve the PP system performance monitoring and
evaluation.
Table. 3 Proposed public procurement system performance indicators
KPI Categories Proposed Indicators
The value of procedures, allocated by type of contract (goods,
services, works)
The average value of procedures, in accordance with the type of
KPI relating to the contract (goods, services, works)
procedure value The value of procedure allocated by type of financing
The value of each type of procedure (open tender, restricted
tender, etc.)
KPI relating to the The frequency of use for each type of procedure by type of
procedure type contract (goods, services, works)
KPI relating to the
bidders Share of joint tenders
KPI relating to the award
criteria The degree of utilization of each award criterion
KPI relating to the The number of procedures, subject to the complaints
complaints
The total number of procedures, canceled by the contracting
1116 Strategica 2016
authorities
The number of the procedures canceled after the decision of the
relevant institutions
The number, total amount and share of public works contracts /
works / supply whose duration has been exceeded, depending
on the type of financing
The number, total amount and percentage of the public
KPI relating to the contracts for works / services / supply, whose initial value has
contract implementation been exceeded, depending on the type of financing
The work presented the performance indicators of the public procurement system in
Romania, reported by the key factors of the public procurement system, the regulatory
and corrective institutions, like NPPA and NCSC. New performance indicators were
identified and recommended in order to improve the evaluation of the public
procurement system, which must refer to the outcome of the contract, it should not be
limited to the outcome of the procedure. The proposed indicators focus on the
outcome of the contract by taking into consideration the implementation phase of the
awarded contract. The article complements the literature by proposing a new set of
indicators for assessing the performance of the public procurement system in order to
improve it. A more efficient procurement process involves a proper functioning of the
controls, a more efficient prevention of fraud and corruption, sustaining a competitive
market and therefore the country's development.
References
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Guvern (2006). GEO no. 34/2006 on the award of public procurement contracts, public
works concession contracts and service concession. Official Gazette, 418, 15 May
2006.
Guvern (2015). Strategia Națională în domeniul achizițiilor publice [The national
strategy in the field of public procurement]. Retrieved from
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blice+final.pdf/84dc3889-a7c7-48db-907f-fa9a63d9822c.
Mardale F. (2015). Atingerea performanței în cadrul achizițiilor publice între deziderat
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nta+in+administratia+locala+In+loc+de+2+au+platit+60-70+.
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